China Galaxy Securities: In October, M2 growth rate accelerated rebound, social financing growth rate declined but structure improved, and monetary policy may maintain loose stance.

China Galaxy Securities issued a research report stating that the growth rate of money supply is on the rise, but the growth rates of social financing and loans are on the decline, presenting a temperature difference between the two. This may be because the improvement in money supply precedes the initiation of social financing and credit, making it a more forward-looking indicator. The positive improvement in money supply is being observed, with information in October's M1 index indicating improvements in property sales and corporate expectations simultaneously. On the other hand, M2 includes information on the improvement in stock market expectations, increased support from the central bank for the capital market, and accelerated fiscal expenditures, which are all of significant importance for pricing in the capital market. Some key points from China Galaxy Securities: Money supply data: M1 growth rate is on the rise for the first time this year, and M2 growth rate is accelerating, further confirming the established trend of M2 moving upwards. The increase in M1 may be supported by four aspects: M0 growth rate reaching a new high since 2023, significant improvement in property sales data, improved corporate expectations leading to increased capital activation, and a reduction in manual interest rate subsidies. Firstly, M0 growth rate in October increased to 12.8% (previous value was 11.5%). Secondly, high-frequency property data shows a significant improvement in sales growth, which can be verified by the improvement in long-term loans to residents in October. Thirdly, corporate expectations may improve, as indicated by the manufacturing PMI returning to the expansion zone and significant improvements in BCI's forward-looking indices for corporate sales, profits, and hiring. Fourthly, in October, unit demand deposits returned to positive growth, with an addition of 459.3 billion yuan, showing an increase in growth rate. Short-term loans are in line with seasonal trends, further validating the assertion that the impact of manual interest rate subsidies may have weakened last month. Despite a decrease in loan growth, the accelerated rise in M2 growth may be supported by three factors: 1. Increase in stock market expectations, leading to a return of funds from the bond market and wealth management products, an increase in securities margin trading, and rapid growth in non-bank deposits; 2. Implementation of two structural monetary policy tools by the central bank to support the capital market (SFISF for non-bank financial institutions and specialized rediscounting for increasing stock repurchases), directly driving the growth of M2; 3. Acceleration in net fiscal expenditures. Private sector deposits decreased by 220 billion yuan in October, less than the decrease of 775.3 billion yuan from the previous year. Among them, resident, corporate, and non-bank deposits increased by -570 billion yuan, -73 billion yuan, and 1080 billion yuan respectively in the month, with respective year-on-year increases of 669 billion yuan, 1352 billion yuan, and 573.2 billion yuan. Social financing data: While the growth rate of social financing has declined, the structure has improved, with an increase in the growth rate of social financing excluding government financing. Government financing has weakened due to a relatively weak support base, but household financing has shown a significant improvement. Improvement in social financing structure. The new social financing added in October was weaker than the same period last year, but was on par with the average of the same period over the past three years. The negative impact on social financing in October mainly came from loans to the real economy and government financing which increased by 271.1 billion yuan and 514.2 billion yuan respectively; while off-balance sheet financing increased by 112.9 billion yuan. Direct financing to corporates decreased by 20.1 billion yuan year-on-year, mostly in line with seasonal trends. Excluding government financing, the growth rate of social financing was 6.19%, up 0.03 percentage points month-on-month. The pace of decline in effective social financing (including long-term loans, entrusted loans, trust loans, and direct financing) slowed down to 6.7% at the end of October, compared to 6.8% previously. Loan growth continues to decline, with personal loans performing better than last year, while long-term loans to corporates remain weak. Financial institutions added 500 billion yuan in new RMB loans in October, the lowest since the same period in 2010. Short-term and long-term loans to households performed better year-on-year, with increases of 154.3 billion yuan and 39.3 billion yuan respectively, possibly due to the gradual effects of consumption stimulus policies and the revival of property sales. Long-term loans to corporates have been weak since April, potentially due to the decreasing role of government project investments in driving long-term corporate loans. Bills financing increased by 14.8 billion yuan year-on-year, with no significant impact from bill financing observed. Monetary policy outlook: "Firmly adhere to a supportive monetary policy stance, increase the intensity of monetary policy regulation, and improve the accuracy of monetary policy". The third quarter monetary policy execution report emphasized a supportive monetary policy stance, an increase in regulatory intensity, and a focus on prices and real estate prices. "Promoting a reasonable increase in prices is an important consideration for monetary policy" and "promoting the stabilization of the real estate market". China Galaxy Securities believes that the monetary policy will maintain a loose tone in order to promote economic growth, achieve full employment, and maintain prices at a reasonable level, which remains a key concern of monetary policy. Three possible paths for looser monetary policy in 2025: 1. Substantial reserve requirement ratio cuts, possibly in the range of 150-200 basis points; 2. Net purchase of government bonds in the open market by the central bank; 3. "Unconventional" interest rate cuts. Referring to the period from 2018 to 2019, when the renminbi faced significant pressure, the central bank implemented loosening measures mainly through substantial reserve requirement ratio cuts while keeping policy interest rates unchanged. In 2025, if the renminbi were to face pressure again, the central bank may keep policy interest rates unchanged while independently lowering the 5-year LPR to drive down financing costs and loosen credit. During periods of easing pressure on the exchange rate, there may be a timely decision to lower policy interest rates. It is expected that policy interest rates will be lowered by around 20 basis points throughout the year, with the 5-year LPR lowered by 40-60 basis points. Risk factors: 1. Risks due to inadequate policy understanding 2. Risks of unexpected actions by the central bank in monetary policy 3. Risks of government bond issuance falling short of expectations 4. Risks of unexpected actions by the Federal Reserve in monetary policy.