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