Just something to think about when you consider Monday’s RRR cut in China, in the context of the capital outflow (and not capital flight stresses PBoC governor Zhou quickly, while upping the comms capability of the central bank) and credit growth.
From SocGen’s Wei Yao:
A 50bp RRR cut could free up close to RMB700bn in liquidity, which would offset the liquidity impact of roughly $100bn in declines in official FX reserves. The FX reserves fell by $100bn in both December and January. Instead of timely RRR cuts, the PBoC was diligently conducting large-scale liquidity injections via open market operations and standing facilities. The PBoC admitted in January that RRR cuts were not preferred then because they could add to depreciation pressure on the RMB. So the subtext of today’s cut is, first and foremost, that the PBoC is less worried about the currency and capital outflows now than just a month ago.
As you’ve surely just seen, China has cut its reserve requirement ratio, by 50bps with effect from Sept 6, and its 1yr lending rate by 25bps to 4.6 per cent with immediate effect.
Markets will like this. And the timing suggests that the ongoing stock market puke did have something to do with the decision.
But there’s also certainly a broader rationale to these moves. Read more
Take your clicks elsewhere if you know everything about China’s reserve requirement ratio already.
For those who don’t (and have asked for something like this) here’s some good Capital Economics on why the RRR is still an effective tool in China — even if you ignore context at your peril. Read more
There have been enough pixels spilt over yesterday’s required reserve ratio cut from China so we’ll keep this short (ish).
First, go read your 2012 Mark Dow explaining why a “Chinese RRR cut is NOT like a rate cut in the developed world. And it does not necessarily signify an easing of the monetary policy stance.”
Which is basically true here again Read more
China is leaking. It’s probably America’s fault. China is, after all, the the most exposed to the quantity effect of liquidity withdrawal due to QE tapering and may have the most difficulty dealing with it.
From Nomura on Monday, for example:
Foreign exchange purchases by financial institutions dropped by RMB41bn, despite the high trade surplus of USD27bn and strong FDI inflows of USD14bn.
Pretty much every China watcher, including us, has written in recent months about how reserve ratio requirement (RRR) cuts by the People’s Bank of China are not necessarily about credit easing. In fact these days, an RRR cut is not so much a move to make more credit available as it is to avoid reductions in liquidity.
Mark Dow, portfolio manager at Pharo Management, has a nice explanation of how this is, and where the RRR fits into the PBoC’s broader monetary policy. It starts with the policymakers’ credit expansion targets, which are believed to be about Rmb8tn to 8.5tn this year: Read more
On Saturday, China’s central bank cut its reserve requirement ratio (RRR) for the second time in less than three months, a move which was expected — though just not now.
Societe Generale’s Wei Yao earlier this month said a cut was unlikely before March, given the fuzzy picture painted by data affected by the lunar new year. Wei believes Saturday’s move was unlikely to have much of an effect, because of the leverage limits applying to smaller banks: Read more
China’s official PMIs went to 50.5 for January, but European markets were not that impressed.
The HSBC/Markit Economics PMIs, meanwhile, were an uninspiring 48.8, compared to 48.7 in December. Read more
FT Alphaville summarizes reactions from BarCap, Goldman and Morgan Stanley to the stronger than expected Chinese inflation data. Economists now expect further policy tightening measures and sooner rather than later. Read more