1 See the last page of this report for important disclosures China Weekly 25bps rate cut is not enough On May 10, PBOC decided to lower both the lending and deposit benchmark rate for 25bps, which was smaller than market expectation of 50bps. Furthermore, banks will suffer as the floating range of deposit rate was expanded from 1.3x to 1.5x. The next rally of stock market should base on the confirmed downward trend of market interest rates, while it has yet to realize for now. Stronger stimulus is necessary when US bond yield is rising, while the issuance of the RMB1 trn debt refinancing has not started. In this case, we expect there will be one more rate/RRR cut and more PSL-like policies in the rest of second quarter. Economic & Policy: 25bps rate cut is not enough On May 10, PBOC decided to lower both the lending and deposit benchmark rate for 25bps, which was smaller than market expectation of 50bps. Furthermore, banks will suffer as the floating range of deposit rate was expanded from 1.3x to 1.5x this time. 1) According to the 1Q Report of Monetary Policy, the benchmark lending rate declined for 65bps after the two rate cuts since last November. However, the average lending rate only dropped 15bps to 6.78%. Besides, banks are unwilling to lower the lending rates in order to protect the interest rate spread. In this case, bigger rate cut is needed as its effect on lowering financing costs is diminishing. Figure 1 The market interest rates have not dropped as much as repo rate Source: Guosen Securities(HK) Research 2) Both domestic and external demand remains sluggish. April export reported as -6.4% (consensus -2%), while import also dropped to -16.2% (consensus -11.3%). In terms of destinations, only export to US increased 3.1%, while export to Euro, Japan and ASEAN were -10.4%, -13.3% and -6.6% respectively. That is to say, the global demand is weak except for the US. Korean exports, which is also a widely watched global trade indicator, declined in April as well. Therefore, we expect China’s export will not achieve the annual target of 6%. April inflation (CPI 1.5%, PPI -4.6%) was basically in line with market expectation, while PPI is expected to rebound next month with the recent increase of global commodities prices. 2.002.503.003.504.004.505.005.506.006.507.002013-022013-032013-042013-052013-062013-072013-082013-092013-102013-112013-122014-012014-022014-032014-042014-052014-062014-072014-082014-092014-102014-112014-122015-012015-022015-032015-042015-057 days repo10 yr bond yieldWMP: 6 monthsHK/China Economic 11 May 2015 The China Economic Forecast for 2015 Q1(A) Q2 Q3 Q4 Real GDP YOY% 7.0 6.9 7.2 7.0 CPI YOY% 1.2 1.3 1.5 1.6 M2 YOY% 11.6 12.5 12.0 12.0 7 days repo % 4.0 2.5 2.8 3.0 10 yr bond % 3.6 3.2 3.3 3.3 USD/CNY 6.20 6.22 6.25 6.25 Source: Guosen Securities(HK) Janice Yu SFC CE No.: BDF565 +852 2899 6758 Janice.yu@guosen.com.hk Macro Research China Weekly Janice Yu, +852 2899 6758, janice.Yu@guosen.com.hk Guosen Securities (HK) 2 Liquidity & Market: the next rally has yet to come The next rally of stock market should base on the confirmed downward trend of market interest rates (including bond yields and lending rates to real economy), while it has yet to be realized for now. 1) Stronger stimulus is necessary when US bond yield is rising. Historically, the inverse relationship between China bond yield and dollar index is quite stable since PBOC always tends to easing when dollar appreciates. However, as the expectation of inflation rise from rebounding commodity prices, most of the global bond yields such as those of the US and Germany has risen recently. In this case, China needs one more rate-cut or RRR-cut to hedge both the impact from strong dollar and higher global bond yields in the second quarter. Figure 2 China bond yield always decline when dollar is strong Figure 3 But it will be impacted by US bond yield as well Source: Guosen Securities(HK) Research Source: Guosen Securities(HK) Research 2) The issuance of the RMB1 trn debt refinancing has not started. Until now, the issuing scheme of local government bond has not been confirmed. Basically, there are two mechanism: one is targeted issuance to banks which have lent money to local government, while the issuance price could be negotiated publicly or privately; the other is public offering especially for non-bank creditors such as trusts, brokers and insurance companies. As no creditors are willing to do the refinancing (change short term and high rates loans to long duration and low yield bonds), PBOC has to support the issuance by strong policies: a) The size of targeted issuance should be much larger than public offe