CICC: The People's Bank of China’s "structural interest rate cut" does not mean that a traditional rate cut will happen immediately. The expectation for a rate cut this year is 10 basis points

CICC published a report stating that the People's Bank of China (PBOC) announced yesterday a reduction of 0.25 percentage points in the interest rates of various structural monetary policy tools, while also announcing five additional measures related to structural monetary policy tools, adjusting the types, coverage, and increasing the quotas of structural monetary policy support tools. In terms of overall impact, this adjustment has a relatively limited direct effect on asset prices, with the key being the subsequent implementation. This policy adjustment reflects the characteristics of the current macro policy approach, maintaining moderate easing in overall terms, placing greater emphasis on structural adjustments, which is consistent with the tone of the Central Economic Work Conference that emphasizes "quality and efficiency." This tone may also be reflected in fiscal policy and the recently convened local two sessions.

An important background for this tone is the current stability of external demand. If there are significant changes in total demand, macro policy still has the capacity to provide support. In response to the market's widespread concerns about the long-term government bond supply-demand gap, the PBOC also provided a direct response, believing that it has the ability to keep government bond yields roughly stable, but the capacity of domestic banks to absorb government bonds is a structural issue that still requires other conditions to be resolved.

CICC pointed out that this "structural interest rate cut" is mainly structural and does not necessarily mean that there will be a traditional "interest rate cut" immediately afterward. At press conferences, the PBOC typically announces both total reductions in reserve requirements and interest rates along with adjustments to structural monetary policy, as it did in May last year. In this press conference, the PBOC mainly announced the interest rate cuts for structural monetary policy tools and did not announce traditional reserve requirement or interest rate cut policies. Meanwhile, the PBOC noted at the press conference that "recently, China's price levels have shown positive changes, and the coordination effect of China's macro policy is continuously strengthening."

Considering this information, CICC tends to believe that this policy adjustment is mainly structural, while maintaining a generally loose tone in overall terms. After the information was released, government bond futures rose slightly before falling back. The policy interest rate expectation index calculated by the firm shows that the current interest rate cut expectations are relatively stable, with expectations for a full-year interest rate cut in 2026 around 10 basis points.

In terms of structural monetary policy, the total amount related to real estate and infrastructure has significantly decreased compared to 2024 and has recently stopped falling. The direction for 2026 may place greater emphasis on technological innovation, green development, service industry development, and support for private enterprises.

CICC believes that the tone of this monetary policy adjustment is consistent with the emphasis on "quality and efficiency" highlighted in the Central Economic Work Conference and may be more reflected in subsequent fiscal policies and local two sessions.

The firm believes that if total demand faces downward pressure challenges in the future, the PBOC still has room for further easing, and other policies also have further room for action. In response to the market's widespread concerns about government bond issuance, the PBOC also provided a direct response. With domestic banks having absorbed a large amount of long-term government bonds and the activation of deposits over the past few years, the duration gap on the bank's asset-liability side has widened, potentially causing the total capital of domestic banks to not meet regulatory requirements for interest rate risk. Therefore, the market is concerned whether the imminent issuance of local government bonds will lead to a rise in interest rates. The PBOC clearly stated that it will "flexibly carry out government bond buying and selling operations, maintaining ample liquidity along with other liquidity tools to create a suitable monetary and financial environment for the smooth issuance of government bonds." The firm believes this also indicates the central bank's willingness to prevent interest rates from rising too quickly However, the issue of the ability of domestic banks to absorb government bonds is essentially a structural capital constraint. It is currently unclear whether this constraint will be resolved in the future or if we will wait for other forces to absorb government bonds