China Economics：Top Questions on Monetary Policy~ Takeaways from PBoC’s MPR 24Q2

Investment Rating - The report maintains a pro-growth tone with expectations of incremental monetary easing, including a forecasted 10-20bps cut in the Loan Prime Rate (LPR) for the remainder of the year [6][19]. Core Insights - The People's Bank of China (PBoC) is balancing short-term growth support with long-term risk prevention, indicating a cautious approach to monetary policy [5][6]. - The PBoC's Monetary Policy Report (MPR) for Q2 2024 emphasizes countercyclical monetary policies to support growth, particularly in the second half of the year [7][8]. - Concerns regarding inflation remain low, with the PBoC expecting a moderate increase in the Consumer Price Index (CPI) and a gradual narrowing of Producer Price Index (PPI) contraction [8][9]. - The report highlights a sharp credit slowdown but notes that monetary policy remains supportive, with significant growth in loans to small and medium-sized enterprises (SMEs) and manufacturing sectors [9][10]. - The PBoC's relending tool for housing buyback has seen limited progress, with only RMB 24.7 billion extended for housing buyback by the end of June, against a total quota of RMB 300 billion [11][12]. - Concerns about bond yields are explicitly mentioned, with the PBoC noting that the 10-year China Government Bond (CGB) yield has deviated from reasonable levels, indicating accumulated financial risks [14][15]. - The report discusses the external constraints on monetary policy, particularly regarding exchange rate stability and the impact of U.S. monetary policy on the PBoC's decisions [18][19]. - A new monetary policy mechanism is emerging, with the 7-day reverse repo becoming the major policy rate, allowing the PBoC to better manage short-end market rates [20][22]. Summary by Sections Monetary Policy Outlook - The PBoC is expected to implement incremental easing, with a focus on countercyclical adjustments to support growth [6][7]. - The inflation outlook remains stable, with expectations of moderate CPI increases supported by seasonal consumption patterns [8][9]. Credit and Lending Environment - Total Social Financing (TSF) grew by 8.1% year-on-year, with M2 growth at 6.2% as of June, indicating a reasonable growth in financial aggregates [9][10]. - Lending rates have reached all-time lows, with the average loan rate at 3.68% in June, which may lead to increased mortgage prepayments [10][11]. Property Market Support - The PBoC's efforts in the housing market through relending tools have been slow, with only a fraction of the total quota utilized [11][12]. - The report suggests that more focused support may be necessary to address ongoing challenges in the property market [12][13]. Bond Market Concerns - The PBoC has expressed concerns about the rising bond yields and the associated financial risks, indicating a need for careful monitoring [14][15]. - The report suggests that while the PBoC's concerns are valid, the effectiveness of its measures to influence long-term yields remains uncertain [15][19]. New Monetary Policy Framework - The report outlines a shift towards a new interest rate framework, with the 7-day reverse repo as the primary policy tool, indicating a simplification of the interest rate system [20][22]. - The coexistence of multiple policy rates may create some confusion in the interim, necessitating further adjustments to the monetary policy framework [22][23].