On the evening of August 31, two long-awaited housing policies finally came out. First, the minimum down payment ratio policy for commercial individual housing loans across the country was unified, no longer distinguishing between cities implementing "purchase restrictions" and those not implementing "purchase restrictions"; second, the interest rate on existing first-set housing loans was reduced.

How to balance the pressure on banks' net interest margins and stimulate the real estate market? How can fiscal and monetary policies be further leveraged? Can the Chinese economy stabilize in the second half of the year? In response to a series of questions, Sheng Songcheng, a professor at China Europe International Business School and former director of the Survey and Statistics Department of the People's Bank of China, accepted an interview with First Financial Daily.

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Reducing the interest rate on existing first-set housing loans aims to stabilize the market

Sheng Songcheng said that the marginal relaxation of real estate market policies has been going on for nearly two years, but the market is still at the bottom. The Politburo meeting on July 24 pointed out that "there have been significant changes in the supply and demand relationship of China's real estate market", which means that the current "loosening" of real estate policies is mainly to stabilize the market, rather than to significantly drive the economy through real estate again. This is a premise for reasonably assessing the effectiveness of policies, and stabilizing the market is effective.

At present, the overall downward trend of China's real estate market has formed. Sheng Songcheng believes that this trend will not be reversed for a considerable period of time, but this does not mean that there are no structural opportunities in the market. Even with a decline in sales, the more developed the area, the smaller the decline. Relatively developed areas themselves have a relatively strong demand for housing, and policies are finally relaxed in these areas, which is also a concern that regulatory relaxation will lead to a sharp increase in housing prices, avoiding repeating the same mistakes.

The necessity of reducing the interest rate on existing loans has increased, Sheng Songcheng believes, because early repayment is a new situation that has emerged since the end of 2022. According to his monitoring of the underlying assets of mortgage ABS, the situation of early repayment in China in April this year was the most severe - at that time, the annualized early repayment rate of existing mortgages reached 21.57%, and some banks exceeded 30%. If this speed continues, more than one-fifth of the mortgages will be repaid early in the year.

"For banks, this is not a good thing, because only with interest-bearing assets can profits be created. Moreover, China's existing mortgage loans amount to 38.6 trillion yuan, accounting for 16.74% of the total loans of the banking industry. By July, the early repayment rate had dropped from the peak of April to 14.49%, but it is still far higher than the level of 2022, and has increased compared to June this year. In addition, starting from September 1, major banks will successively lower deposit interest rates, and existing mortgages will face greater pressure to repay early. It is still necessary to reduce the interest rate on existing mortgages."

It is necessary to take into account the net interest margin of commercial banks

The reason why the pace of reducing the interest rate on existing loans seems slower than expected is also closely related to the continuous decline in the net interest margin of banks. In addition, many banks have told reporters that they will lower deposit interest rates starting in September, with a reduction of 5-25BP for each term.

Sheng Songcheng analyzed that the net interest margin of China's commercial banks is already at a low level, whether from a historical range or from an international comparison. As of the end of June, the net interest margin of China's commercial banks was 1.74%, the lowest since statistical data was available in 2010.At the same time, the net profit of commercial banks in our country has also declined. In the first half of this year, commercial banks achieved a cumulative net profit of 1.3 trillion yuan, a year-on-year increase of 2.6%, with the growth rate falling by 4.5 percentage points compared to the same period last year. In the second quarter of this year, the non-performing loan ratio of commercial banks in our country was 1.62%, which was the same as the first quarter, and the overall trend was downward.

In addition, China is still a financial market dominated by indirect financing, and commercial banks play an important role in the implementation of monetary policy. Sheng Songcheng said that unlike fiscal policy, which can directly intervene in economic activities, monetary policy generally plays an indirect role and requires the cooperation of commercial banks and even the entire financial system. The effectiveness of its implementation is greatly influenced by market feedback to a considerable extent.

According to the special column of the central bank's second quarter monetary policy implementation report, "The net profit of our country's commercial banks is mainly used to replenish core tier-one capital and distribute dividends to shareholders, and then act on the real economy again through the leverage effect of capital." At present, the ways for Chinese commercial banks to replenish capital are few, and the capital pressure is relatively high. Against this background, increasing the net interest margin and profit level of commercial banks can effectively help banks replenish core capital and enhance their ability to serve the real economy.

Therefore, Sheng Songcheng also believes that whether future policies will continue to exert force should be further assessed after the current policy implementation. Real estate has a strong financial attribute, which determines that housing prices are easy to "over-adjust", and it takes a certain amount of time to return to normal. "Although the supply and demand relationship of our country's real estate market has undergone significant changes, long-term factors such as economic growth, urbanization, and population stock determine that our country's real estate market has a bottom to rely on. Stabilizing the market and eliminating panic factors brought about by market overshoot should be the focus of real estate policy efforts."

The economy is expected to continue to improve in the third and fourth quarters.

At present, external risks are also a matter of great concern. The yield on two-year U.S. Treasury bonds once again touched above 5%, and the inversion of the China-U.S. interest rate difference has remained at a record high.

Not long ago, the global central bank summit was just held in Jackson Hole. At this summit, Federal Reserve Chairman Powell and European Central Bank President Lagarde both expressed concerns about inflation far exceeding concerns about economic downturns, conveying a "hawkish" signal beyond market expectations. Of course, the actual interest rate decision still needs to be based on observations of economic and inflation data, and fully consider the "time lag" of monetary policy tightening. The latest released U.S. ADP employment report shows that the number of U.S. ADP employees increased by 177,000 in August, a sharp decline of 45% month-on-month. Sheng Songcheng estimates that the Federal Reserve's future interest rate decisions will be more characterized by "one step at a time, looking one step at a time", which is also the process of "trial and error" in monetary policy.

China's monetary policy has always been "self-centered", taking into account both internal and external balance. In the short term, there is still pressure for the depreciation of the renminbi. However, he believes that as the spillover impact of the Federal Reserve's interest rate hikes gradually weakens and China's economic fundamentals improve, the renminbi exchange rate will remain basically stable. After the policy release on August 31, the offshore renminbi against the U.S. dollar quickly strengthened.

"The August manufacturing PMI data has already shown signs of improved demand, increased procurement by enterprises, and expanded production. China's manufacturing PMI has improved for two consecutive months. Although it is still below the critical point, the trend of the manufacturing industry's marginal improvement is more obvious than last month. Not only have most of the sub-indices improved compared to last month, but the production index, new order index, and supplier delivery time index are all above the critical point. Moreover, the differentiation trend of PMI among large, medium, and small enterprises has been reversed, and a comprehensive improvement has occurred, with enterprises showing initial signs of active inventory replenishment. The current period is a key period for economic recovery. I believe that counter-cyclical regulation should continue to be strengthened. This will help to consolidate the foundation for economic stability and recovery, and it is expected that China's economy will continue to improve in the third and fourth quarters." He said.

Against this background, Sheng Songcheng believes that China will continue to implement proactive fiscal policies and appropriately loose monetary policies, focusing on the coordination and cooperation between fiscal and monetary policies. The Ministry of Finance has stated that this year's new special bonds will strive to be basically issued by the end of September. Most of China's national debt and local government bonds are purchased by commercial banks. At present, 68.8% of China's national debt is held by commercial banks, and 85.5% of local government bonds are held by commercial banks. Reducing reserve requirements will increase the funds that commercial banks can freely use, thereby better supporting the issuance of national debt and local debt. Looking at the interbank market fund interest rates, on August 30, the weighted average interest rate of 7-day pledged repurchase (R007, DR007) for financial institutions both reached a new high in recent days, with R007 and DR007 reaching 2.44% and 2.25%, respectively. The possibility of China reducing reserve requirements in the future still exists.