Event: The central bank announced that in order to maintain a reasonable and sufficient liquidity in the banking system, it conducted a Medium-Term Lending Facility (MLF) operation of 300 billion yuan on September 25th, with a term of one year, the highest bidding rate at 2.30%, the lowest bidding rate at 1.90%, and the winning bid rate at 2.00%. After the operation, the MLF balance stands at 6,878 billion yuan.

Core viewpoint: Following the monetary policy combination on September 24th, the MLF interest rate cut followed just one day later, marking a period of accelerated policy implementation with a strength of 30 basis points (bp), which is the largest adjustment since the creation of the MLF. This will boost economic confidence, appropriately alleviate the pressure on banks' net interest margins, and enhance the confidence in the stock and bond markets, assisting in escaping the deflationary trap. It is expected that future deposit and loan interest rates will further decrease.

Monetary policy has done its utmost, and there is an anticipation for fiscal policy and real estate policies to coordinate and introduce a comprehensive large-scale economic stimulus plan, adopting a combination of measures with a scale of over 10 trillion yuan, including 4-5 trillion yuan in ultra-long-term government bonds for local debt restructuring to alleviate the financial difficulties of local governments and reduce the burden on enterprises that have been overdue in payments; a housing bank with a scale of 3-5 trillion yuan to purchase local government land inventories and developers' unsold commercial housing for public housing; relaxing restrictive measures such as purchase restrictions, credit limits, sales limits, and price limits that were tightened during the overheated market period, returning to marketization, with first-tier cities starting to relax restrictions on suburban and large apartment purchases; vigorously promoting new infrastructure, new energy, and new quality productive forces; and increasing childbirth subsidies. The scale should be large, the cost of funds should be low, and the sense of gain for the public should be strong.

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1. Reason: Rapid implementation of stable growth policies, reduction of real interest rates, and assistance in escaping the deflationary trap

Firstly, it is a rapid response to the comprehensive policy package on September 24th. The MLF interest rate cut follows the OMO interest rate cut, consolidating the new interest rate transmission mechanism. On September 24th, the central bank announced a comprehensive set of monetary policy measures at a press conference held by the State Council Information Office, with a 20 basis point reduction in OMO interest rates. Moreover, Governor Pan Gongsheng clearly stated in response to a reporter's question: "It is expected that after this adjustment of policy interest rates, the Medium-Term Lending Facility (MLF) interest rate will be reduced by approximately 0.3 percentage points." This is the direct reason for the MLF interest rate cut.

Secondly, it seizes the time window for stabilizing the economy. Domestically, this year's economy has shown a "high front and low back" trend, with signs of over-adjustment in the past two months. Domestic consumption and investment are weak, with a 18.0% year-on-year decrease in the sales area of new commercial housing from January to August, and exports face constraints from declining external demand and trade frictions. The pressure to achieve an economic growth target of around 5% this year remains significant. Overseas, on September 19th, the Federal Reserve lowered interest rates by 50 basis points, and the world has entered a period of easing, with the appreciation of the renminbi and the opening up of monetary policy space.

Thirdly, the current real interest rates are still high. The Producer Price Index (PPI) has been negative for more than 20 consecutive months, and the Consumer Price Index (CPI) is hovering around zero. At present, although China's nominal interest rates have been continuously reduced, the real interest rates after deducting inflation are high, and the real interest rates are relatively high globally, which is not conducive to consumption and investment. Real interest rate = nominal interest rate - inflation rate. Currently, CPI is approaching zero, and the real interest rate remains high. The borrowing cost for enterprises and individuals is relatively heavy, which may suppress investment and consumption, affecting economic recovery. It is necessary to use monetary policy tools to raise expectations for price increases, encourage residents and enterprises to increase borrowing, investment, and consumption, and assist in escaping the deflationary trap.

2. Method: Follow-up reduction, volume shrinkage and price reduction, interest rate role transformation, and the largest amplitude in nearly five years

In terms of timing, the follow-up reduction is timely and strong. The new monetary policy framework takes the OMO interest rate as the policy benchmark, and the guiding significance of MLF is weakened to follow, with a smooth transmission mechanism. The interest rate cut this time is only one day apart, and MLF quickly responds and follows up, releasing a positive signal for stable growth.

In terms of amplitude, the strength is large, and there is still room for decline in the future. The strength of this MLF interest rate cut is in line with expectations and has reached a historical high. MLF is positioned as a one-year liquidity tool for banks to borrow from the central bank. Compared with issuing interbank negotiable certificates of deposit to borrow liquidity from other banks, the current one-year interbank negotiable certificates of deposit interest rate center is around 1.9%, and there is still room for the MLF interest rate of 2% to decline.In terms of operational volume, although there is a reduction in the continuation of operations, liquidity is not a concern. The injection scale of 300 billion yuan is less than the 591 billion yuan maturing this month, but the focus of this MLF is on price rather than quantity. The 0.5 percentage point reserve requirement ratio cut on September 24 has already released trillions in liquidity, combined with this 300 billion yuan MLF, it is enough to offset the impact of maturities. In the fourth quarter, there will be a maturity peak of 3689 billion yuan MLF, and there is still room for reserve requirement ratio cuts, MLF, and central bank bond purchases to release liquidity.

3. Impacts: In conjunction with policy "big gift bags," it reduces the cost of bank liabilities, injects liquidity into the market, and boosts market confidence and capital vitality.

Firstly, for the economy, the MLF rate cut helps to reduce the financing costs for businesses and residents, thereby stimulating domestic demand and boosting the economy. After the MLF adjustment, the cost for commercial banks to borrow from the central bank is reduced, which may further lower the loan interest rates provided by banks to businesses and residents, stimulating consumption and domestic demand, and driving economic recovery.

Secondly, it provides banks with low-cost, long-term funds, reducing the cost of bank funds, with deposit interest rates moving downward in sync, stabilizing the net interest margin of banks. Currently, the net interest margin of banks is at a historical low, with commercial banks at 1.54% in the first half of the year. This MLF unexpectedly cut by 30 basis points, easing the pressure on the liability side of banks and stabilizing the net interest margin.

Thirdly, for the stock market, it helps to boost market confidence in economic recovery, attract foreign capital inflows, and support the stock market. On September 24, the Shanghai Composite Index closed up 4.15%, breaking through 2800 points, and the ChiNext Index surged 5.54%. The emotional boost brought by policy benefits may continue.

Fourthly, for the bond market, the liquidity benefits from monetary policy easing, which is favorable for the bond market to strengthen, with medium and short-term bonds outperforming long-term bonds. In the short term, interest rate cuts lead to a reduction in loan interest rates, enhancing the cost-effectiveness of medium and short-term bonds. However, interest rate cuts do not mean that there is room for long-term bond yields to decline. Long-term bonds represent future economic expectations, and currently, China's long-term bond rates are too low, and potential risks in long-term bonds need to be vigilant.

Fifthly, for the foreign exchange market, although interest rate cuts can affect the exchange rate through interest rate differentials, under the current global context of interest rate cuts, the pressure on the renminbi exchange rate is relatively light. Moreover, interest rate cuts inject confidence into the economic fundamentals, which can better boost exchange rate appreciation and attract foreign capital inflows. As of today, the renminbi exchange rate has broken through 7 for the first time since last May.

4. Outlook: With one鼓作气, looking forward to fiscal policy, and协同开启大规模刺激计划

Monetary policy has done its best, what is fiscal policy waiting for? Against the backdrop of a year-on-year decrease of -5.4% in national tax revenue from January to July, non-tax revenue, represented by fines and confiscations, has grown at a high rate of 12%, amounting to 2.44 trillion yuan. Local governments' arrears of wages have become a common phenomenon, and a large number of small and medium-sized enterprises have been owed project payments by local governments, leading to a wave of layoffs and pay cuts. What is more serious is that market confidence has been hit, and businesses lack a sense of security.

It is recommended to introduce 4-5 trillion yuan in local bonds or special treasury bonds to alleviate the financial difficulties of local governments and reduce the burden on enterprises that have been owed. At the same time, a nationwide unified debt resolution plan should be formulated to allow local governments, financial institutions, and other stakeholders to share responsibilities; regulations and administrative measures should be introduced to establish a local government asset trading mechanism, allowing local governments to resolve existing debts with assets. Ultimately, the reforms of the Third Plenary Session should be completed, the balance sheets of governments at all levels should be compiled, the role of local people's congresses should be played, and the generation of new debts should be controlled.The hidden debt of local governments must be addressed, but the approach requires careful consideration. In recent years, the regular deficits of local governments have reached 4.2 trillion yuan, and their financial resources are already stretched thin. It is unrealistic to demand that local governments take individual actions to clear existing hidden debts. With the current financial strength, many local governments struggle to pay the interest on their debts, let alone repay the principal. Under the dual pressures of debt reduction and decreased local revenue, local governments can only increase income by opening up channels for confiscation and seizure of income, and on the other hand, save expenses by reducing salaries and delaying wage payments. The fiscal contraction of local governments is an important reason for the insufficiency of domestic demand.

We look forward to the finance, housing and urban-rural development, and development and reform departments also holding a press conference similar to the one held by the central bank this morning. A comprehensive large-scale economic stimulus plan should be introduced, adopting a combination of measures to boost market confidence with a scale of over 10 trillion yuan, including local debt resolution, new infrastructure, consumer subsidies, fertility subsidies, housing banks, etc. Special treasury bonds, ultra-long-term treasury bonds, and central bank re-lending should be used as tools, with a large scale, low cost of funds, and a strong sense of gain for the public.