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President Xi hosted the regular Politburo meeting on 1H 2019 economic performance on 30 July. The policy statement pointed out increasing downward pressure faced by the economy in 2H19.

Though the statement called for policy adjustments to ensure growth stability, it ruled out an immediate need for aggressive easing.

It is particularly worth mentioning that the statement removed the sentence "allowing individual cities to implement their home-purchase policies" and instead for the first time said clearly "the government will not use real estate as a short-term means of stimulating the economy".

In fact, PBOC Governor Yi Gang, not long before the Politburo meeting, did talk about potentially linking the LPR (loan prime rate, currently 4.31%) to the MLF (medium-term lending facility) rate in its interest rate reform. On the one hand, this may mean increasing the likelihood of cutting the MLF/TMLF rate to lower the lending rate and on the other hand, decreasing the chance of a reverse repo rate cut following a Fed easing.

It is believed that linking the LPR to the MLF or SLF rate will improve monetary policy transmission and lower SME borrowing costs (chart 1). Obviously, it is aimed at helping SMEs (small/micro enterprises) get access to lower-cost funding.

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However, given SMEs' relatively weak credit quality, we think banks eventually will invest more in bonds rather than substantially increasing loans supply to the SMEs (note: rejection rate currently still as high as 58%) especially when Beijing has no intention to allow the banking sector to increase home mortgages supply in the near term.

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Strategy recommended: Buy 10-year CGB (current yield 3.18%) for initial profit target 3.06

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