Well, everyone knew this was coming, and it’s welcome news.
China delivered an RRR cut on Sunday of 50bps, a move that will effectively equate to a liquidity injection of more than $100 billion.
Specifically, the PBoC is “encouraging” policy banks to promote debt-to-equity swaps, presumably in an effort to help companies reduce leverage while the cut for smaller banks is aimed at assisting “small and micro enterprises” and alleviating “funding difficulties.” The PBoC says using the newly freed up funds for “zombie companies” is a no-no.
Like the last cut, this will help folks pay back MLF and is just another effort to ensure that liquidity remains ample as the shadow banking system contracts amid the broader deleveraging push.
“We think the sustained tightening of shadow financing has resulted in a notable slowdown in broad credit growth and rising bond defaults due to increasing difficulty in corporate refinancing,” Barclays wrote last week before breaking things down as follows:
Indeed, looking at the breakdown, the sharp decline in BACA (Barclays Alternative Credit Aggregate) growth (-2.1pp during January-May) was mostly attributable to slowdown in shadow credit (-1.8pp) — eg, trust loans, entrust loans, bank acceptance bills — while government bonds and bank loans only dragged 0.5pp and 0.3pp, respectively.
There are also some seasonal factors at play here with a quarterly bank health checkup and tax payments looming.
“The intensity of the move exceeded market expectations,” Reuters quotes Wang Jun, Beijing-based chief economist at Zhongyuan Bank, as saying on Sunday. “This move will help support the real economy and stabilize financial markets”, he added.
“The size of the liquidity being unleashed has beat expectations and it’s larger than the previous two cuts this year”, Citic’s Ming Ming told Bloomberg, before noting the sweeping nature of the move: “It’s almost a universal cut as it covers almost all lenders.”
Again, this was widely telegraphed and comes as the SHCOMP teeters on the edge of a bear market:
In addition to the perception that financial stress is building, the move is also a response to economic deceleration, which recently manifested itself in an across-the-board miss on retail sales, FAI and industrial output.
China also broke with recent precedent after the June Fed hike by holding off on raising OMO rates, a decision that clearly tipped today’s RRR cut.
For their part, Goldman expects a 50bp cut in RRR each quarter and a 25bp cut in the 7D repo rate sometime later this year. The yuan recently fell to a five-month low, but as of yet, there are no concrete signs that the PBoC is set to use the yuan as a weapon in the trade war:
Finally, do note the timing. The cut is effective July 5 – so, one day ahead of D-Day on tariffs. As Barclays writes in the same note cited above, “the direct effect of US tariffs on USD50bn of Chinese imports is manageable, [but there are] downside risks from the threat of additional tariffs on USD200bn of imports being implemented sooner than expected.”
Right.
So let’s see if this is enough to engineer a rally in Chinese assets after the fifth weekly decline for the SHCOMP and the worst week since Vol-pocalypse.
This move might be successful in bringing more debt to PBOC’s direct control without making that obvious to the public (unlike, say, QE), but the problem of keeping their export pipe flowing remains.
The PBOC still can’t print USD or stop time. Having totalitarian control of ever-growing yuan debt can at best bring only small comfort as the world economy continues its struggle to evolve and gain traction.