Core Insights - The Federal Reserve is expected to remain in a rate-cutting cycle in 2026, with moderate inflation not posing a significant constraint on rate cuts. Price data indicates that inflation in the U.S. has not shown an abnormal rebound, supporting the Fed's potential rate cuts [4][7] - In China, monetary easing remains necessary, but banks need to prioritize "anti-involution" measures first. High debt pressures in real estate and local government sectors necessitate monetary easing to mitigate risks, but the current space for easing is limited due to low net interest margins [4][8] - Limited monetary easing is anticipated at the beginning of next year to stimulate the economy and align with fiscal debt issuance. A significant amount of local government debt is expected to be issued in early 2026, necessitating potential reserve requirement ratio cuts to stabilize liquidity [4][15][16] - The misalignment of monetary policies between China and the U.S. is expected to support the appreciation of the Renminbi, with trade surpluses providing long-term support for the currency. Since February 2020, China has maintained a positive trade balance, indicating strong foreign exchange accumulation [4][18] Summary by Sections Section 1: Monetary Policy in the U.S. - The U.S. is likely to enter a new round of rate cuts in 2026, with inflation rising moderately and not significantly constraining the Fed's decisions. The CPI in September increased by 3.0%, slightly above August's 2.9% but below market expectations [7] - The influence of Trump's tariff policies has resulted in lower-than-expected price increases for goods, indicating weak terminal demand and limited price pass-through to consumers [7] Section 2: Monetary Policy in China - China's monetary easing is deemed necessary due to high debt pressures in real estate and local government sectors, but the current easing space is limited. As of Q3 2025, the net interest margin for commercial banks fell to 1.42%, a historical low [8][10] - The need for banks to adopt "anti-involution" strategies is emphasized, focusing on maintaining reasonable interest rate relationships rather than merely adjusting deposit rates [13][14] Section 3: Economic Stimulus and Debt Issuance - Short-term monetary easing is expected at the start of the year to stimulate economic growth and support fiscal debt issuance. The issuance of local government debt is anticipated to be significant in early 2026 [15][16] - The potential need for reserve requirement ratio cuts is highlighted to release long-term liquidity and stabilize interbank liquidity fluctuations [16] Section 4: Currency Dynamics - The divergence in monetary policies between China and the U.S. is expected to create a foundation for the Renminbi's appreciation, supported by ongoing trade surpluses. Since February 2020, China has consistently recorded positive trade balances, indicating strong foreign exchange demand [18][19]

Core Viewpoint - The report from China Merchants Securities indicates that the banking sector is expected to see a reopening of excess return windows as macro liquidity approaches its peak, despite ongoing pressures from insurance non-standard maturities and a mid-term market outlook that remains positive for banks [1][2]. Group 1: Market Performance and Trends - From mid-July to mid-August, market trading volume increased and indices reached new highs, leading to a reduction in bank focus [1]. - As of August 29, 42 A-share banks reported a year-on-year revenue growth of 1.03%, PPOP growth of 1.13%, and net profit growth of 0.77% for the first half of 2025, showing improvements compared to the first quarter [2]. Group 2: Banking Sector Dynamics - The banking sector's profit improvement in Q2 was attributed to a reduction in bond market pressures and a decline in deposit rates, which provided confidence in bank interest margins [3]. - The report highlights that if the asset side of banks does not align with the reduction in deposit costs, the benefits may be negated by continued credit demand pressures [3]. Group 3: Policy and Structural Changes - The need for banks to focus on serving the real economy and high-quality development is emphasized, with a warning against low interest rates leading to misallocation of resources and increased non-performing loans [4]. - Macro policy design is crucial for guiding banks to prioritize genuine credit demand and avoid internal competition, especially during economic downturns [5]. - Positive changes are noted in policy measures aimed at improving the banking sector's asset side pressures, with expectations for a shift towards supporting the real economy and enhancing overall economic well-being [5].

Core Viewpoint - The banking industry is experiencing intense "involution" competition, leading to a decline in profitability and increased credit risks, prompting regulatory bodies to implement measures to promote sustainable and differentiated competition [1][2][4]. Group 1: Involution Competition and Its Impact - Some banks are lowering loan rates, extending loan terms, and relaxing approval conditions to attract customers from competitors, which directly leads to delayed credit risks [1]. - The phenomenon of "involution" is eroding industry profits, particularly squeezing the survival space of small and medium-sized banks due to a lack of product innovation and high homogeneity [1][4]. - Regulatory bodies in regions like Shanghai, Guangdong, and Zhejiang are launching initiatives to combat involution, targeting issues like mortgage rebates and commission payments, urging banks to adopt innovative service models and differentiated competition strategies [1][2]. Group 2: Regulatory Measures and Industry Response - Guangdong's banking sector plans to implement a comprehensive system to address involution, including a negative list for improper competition and self-regulatory measures [2]. - Ningbo's banking association has introduced a self-regulatory convention for personal housing loans, emphasizing fair competition and prohibiting any form of improper competition [2][3]. - The Ningxia Banking Association is conducting extensive research to understand market strategies and challenges, focusing on the issue of commission rebates in the housing loan sector [3]. Group 3: Long-term Implications and Strategic Shifts - The ongoing price competition is causing banks to engage in practices like deposit interest subsidies and loan price wars, disrupting the market order [3][4]. - The internal assessment mechanisms of banks often prioritize short-term growth, leading to a cycle of price wars despite awareness of their detrimental effects on the industry [4][5]. - Banks are encouraged to abandon short-term profit-seeking behaviors and enhance their service quality and product innovation to achieve sustainable development [5][6].