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China Delivers RRR Cut Amid Rapidly Deteriorating Sentiment

Welcome news, but no game changer.

Everyone knew it was coming, the question was “when?”

The answer, as it turns out, is “now.” Or actually, on January 15 and then again on January 25.

After a week that saw both the official and Caixin PMIs disappoint and amid rapidly deteriorating sentiment, the PBoC has delivered another RRR cut in an effort to bolster the economy. The required reserve ratio for banks will drop 0.5% on January 15 and by another 0.5% ten days later.

This will free up a net CNY800 billion of liquidity, the PBoC says. It will also reduce interest payment burdens and supplants higher-cost funding. Again, it looks like recent manufacturing data might have pulled the move forward.

PMIs

(Bloomberg)

This looks larger than at least some analysts expected and it’s across-the-board, in contrast to 2018’s cuts which were more narrowly construed. This is also an effort to get out ahead of seasonal cash demand. The announcement comes just three weeks after the PBoC introduced a new “targeted” version of its MLF facility.

“The last time the manufacturing PMI remained in contraction territory for consecutive months was August 2015 to February 2016 [and] during this period, the PBoC cut the RRR three times for a total of 150bp (50bp each), and lowered its OMO 7d repo rate twice (by 15bp and 10bp)”, Barclays writes on Friday, adding that “while the NBS PMI only fell into contraction in December, our credit impulse analysis suggests it is likely to weaken further and remain in contraction territory in Q1.”

(Barclays)

The RRR announcement came after the market was closed, but it was a good day for Chinese shares. In fact, it was the best day in a month for the Shanghai Composite, which surged more than 2%.

SHCOMP

(Bloomberg)

Leading gains were banks after Premier Li Keqiang spent the day hanging out with ICBC, China Construction Bank, and Bank of China. Shares of all three rose sharply. Steve Mnuchin should take notes – maybe instead of phone calls and tweets he should go park himself on the couch in Jamie Dimon’s office.

UpBanksChina

(Bloomberg)

Whether the RRR cut will be “enough” is debatable. China’s credit impulse is fading and the economic deceleration appears to be broad-based. It’s likely going to take an honest-to-God, full-throttled stimulus push to turn this ship around and while today’s move is welcome, it probably isn’t a game changer.

“Our base case forecast (6.2% 2019 growth) had expected the PBoC to cut the RRR every quarter, with a total of 200-300bp (including MLF replacements) in 2019, to supply liquidity and lower the banks’ funding costs”, Barclays went on to write, in the same note cited above, before predicting that “after today’s 100bp RRR cut and in view of the latest developments on the domestic, external and policy fronts we now expect another 200-300bp RRR cut (including MLF replacement) in the remainder of 2019.”

We’re gonna need more liquidity.


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