The PBoC delivered on its promise to inject 1.2 trillion yuan on Monday, enough to cover all maturing funding and then some.
On Sunday morning, I suggested that more important than the liquidity injection itself (which, when you net out the maturing funding, amounts to just 150 billion yuan), is the rate at which it’s offered.
Well, in what should be a boon to risk assets, China slashed the 7-day and 14-day repo rates by 10bps. That is a big move. You’ll note that November’s cut to the 7-day rate was the first since 2015. Now, we’ve seen two in three months.
It remains to be seen what steps will be taken next. I continue to assume that the MLF rate will need to be cut (e.g., if the PBoC injects longer-term funds as part of its crisis response) in order to pave the way for a cut to the loan prime rate later this month.
For now, the signaling effect of the 10bps cut to the OMO rates should be substantial. It’s not going to turn things around for equities, but these cuts are twice as large as the token 5bps cuts to the 7-day and 14-day rates in November and December, respectively.
Meanwhile, Beijing said industrial profits sank 6.3% in December. That seems like something of a letdown. October’s 9.9% plunge was the worst on record, making November’s 5.4% bounce seem like very good news. Now, we’re right back moving in the wrong direction.
That’s the fourth decline in five months and may rekindle worries that between the slowing economy and Beijing’s newfound tolerance for defaults, the situation in China might get materially worse before the trade truce and the slow drip of PBoC easing has a chance to work its way through. The virus scare will heighten those concerns.
China has been struggling with a pernicious combination of falling factory gate prices and the highest CPI inflation in seven years, a juxtaposition that’s left policymakers in something of a bind. Obviously, PPI deflation is hurting China’s industrial companies.
The Caixin PMI (also out Monday) held up ok, printing 51.1 for January. The official gauge was inline at 50.0 last week. The market is going to look right through those numbers considering they won’t capture the full effect of the virus.
When you think about the liquidity injection, remember that more than 1 trillion yuan in funding matured on Monday, so the net injection will be somewhere between 150 and 175 billion yuan.
Rolling the maturities and adding extra liquidity on top is an important step, but the rate cut matters – a lot. It serves a crucial purpose as a signaling mechanism for markets wondering what comes next.
The message: The PBoC is ready to do “whatever it takes” — pardon the central bank cliché.