Core Viewpoint - The People's Bank of China (PBOC) announced a 10 basis points reduction in the Loan Prime Rate (LPR) on May 20, marking the first interest rate cut of the year, which is expected to lower the overall financing costs for the real economy and stabilize the net interest margin of commercial banks [1][9][10]. Summary by Sections Interest Rate Changes - The LPR was reduced from 3.0% to 2.9% for first-time homebuyers, which translates to a total interest savings of approximately 38,600 yuan over a 30-year mortgage for a loan of 2 million yuan [1][3]. - Multiple banks, including China Construction Bank, China Merchants Bank, Industrial and Commercial Bank of China, and Agricultural Bank of China, have announced reductions in deposit rates, with the most significant cuts being 15 basis points for various term deposits [5][6][7][8]. Impact on Financing Costs - The reduction in LPR and deposit rates is expected to further decrease the comprehensive financing costs for the real economy, thereby reinforcing the economic fundamentals [3][10]. - The PBOC's adjustment of the 7-day reverse repurchase rate from 1.50% to 1.40% is anticipated to influence various market rates, including the LPR and deposit rates, promoting consumption and investment [9][10]. Banking Sector Response - The banking sector is responding to the PBOC's policy changes, with state-owned banks typically leading the way in adjusting deposit rates, followed by joint-stock and smaller banks [10]. - The net interest margin of commercial banks has been under pressure, declining to 1.43% in the first quarter of this year, which is below the regulatory acceptable level of 1.80% [10].

Core Viewpoint - The People's Bank of China (PBOC) has lowered the 7-day reverse repurchase rate from 1.50% to 1.40%, aiming to stabilize commercial banks' net interest margins and reduce the comprehensive financing costs for the real economy, thereby supporting economic fundamentals [1][2]. Group 1: Monetary Policy Actions - On May 8, 2025, the PBOC conducted a reverse repurchase operation of 158.6 billion yuan at a fixed rate, resulting in a net injection of 158.6 billion yuan as there were no reverse repos maturing that day [1]. - The operation rate for the 14-day reverse repurchase and temporary repos will continue to be determined based on the 7-day reverse repurchase operation rate, with the adjustment range remaining unchanged [2]. Group 2: Economic Implications - The rate cut is expected to lead to a decrease in the Loan Prime Rate (LPR) by approximately 0.1 percentage points, which will help lower the financing costs for the real sector and enhance financial support for the economy [2][3]. - The current high actual interest rates in China necessitate a reduction in the LPR to improve investment and consumption sentiment, thereby supporting the development of the real economy [3].

Core Viewpoint - The liquidity in the market has been tight since the beginning of the year, with short-term interest rates rising without immediate transmission to long-term rates due to several factors, including increased demand for long-term bonds and changing market expectations regarding interest rate cuts [1][2]. Group 1: Initial Conditions for Short-Term to Long-Term Rate Transmission - The initial lack of transmission from short-term to long-term interest rates is attributed to three main factors: increased demand for long-term bonds due to the "opening red" period and deposit self-discipline, heightened concerns over tariffs leading to increased risk premiums, and a stronger "substitution effect" of long-term bonds over short-term bonds [4][5][6]. Group 2: Recent Developments in Rate Transmission - Since February 6, the pressure from short-term rates has begun to transmit to long-term rates, with the 10-year government bond yield rising from 1.60% to 1.76%. This change is driven by three mechanisms: a decrease in the pulse demand for long-term bonds, a marginal correction in interest rate cut expectations, and an increase in the opportunity cost of long-term bond investments [8][9][10]. Group 3: Future Outlook for Long-Term Bond Yields - The tightening liquidity environment may lead to a return to a more stable long-term bond yield, with expectations that the liquidity environment will shift back to a more accommodative stance. The future trajectory will depend on the extent of fiscal stimulus and the strength of economic recovery [12].