China pulled the trigger on an RRR cut Friday, just two days after the State Council tipped a dovish pivot.
The PBoC slashed the reserve requirement by 50bps (figure below), a move Beijing said will free up 1 trillion yuan in long-term liquidity. It’s effective from July 15.
Analysts spent the 48 hours since the State Council’s remarks speculating on how long the PBoC would wait. As it turns out, the answer was “not long.”
The PBoC described the decision as conducive to “supporting the development of the real economy and promoting a steady decline in comprehensive financing costs.” The cut brings financial institutions’ weighted average deposit reserve ratio to 8.9%.
“Since the beginning of this year, the prices of some commodities have continued to rise, and some small and micro enterprises are facing operating difficulties such as rising costs,” the PBoC said, announcing the move.
Data out Friday suggested Beijing’s efforts to rein in spiraling producer price inflation have met with some success. PPI rose 8.8% in June, down from May and in-line with estimates (figure below).
CPI came in below expectations. Consumer prices rose 1.1% last month.
There are a couple of ways to look at this and they’re intertwined. It’s impossible to know “the precise impact of Beijing’s high-profile, multi-pronged campaign to batter down commodities prices [but] the implications of softer prices are becoming clear,” Bloomberg wrote Friday. “A less frenzied commodities market and peak inflation give authorities more policy space to tackle rising pressures on the economy.” It’s difficult to ease when price pressures are rapidly building, so arresting (figuratively and, if necessary in China, literally) the surge in commodities is a prerequisite of sorts when it comes to adding policy support.
At the same time, it’s obvious that Chinese producers are compelled to simply eat rising costs. Retail sales continue to underperform expectations in the world’s second-largest economy. Relatively lackluster domestic demand prevents producers from passing along upstream price pressures to consumers. That conjuncture isn’t exactly the stuff booming economies are made of, which underscores the need to ease, as the PBoC did Friday.
In the statement announcing the RRR cut, the central bank deployed the usual, boilerplate language. It will “continue to implement a prudent monetary policy, adhere to the principle of stability, maintain reasonable and sufficient liquidity and keep the money supply and the growth rate of social financing basically matched with the nominal economic growth rate.”
Speaking of that, credit growth accelerated in June, the latest financing data, also out Friday, showed. New yuan loans were 2.12 trillion yuan (figure below), more than the 1.85 trillion consensus expected and near the top-end of the range (1.7 trillion to 2.2 trillion).
Aggregate financing of 3.67 trillion yuan matched the highest estimate from nearly two-dozen economists, and was up markedly from May.
While it’s always “prudent” (to use the PBoC’s favorite word) to parse the TSF data before chancing an assessment, the combination of accelerating credit growth and the RRR cut pretty clearly suggests that all pretensions to keeping credit provision “basically stable” notwithstanding, Beijing is moving preemptively to support an economy that’s seen flagging.
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Remember, China’s credit impulse turned negative in May on some lookbacks. M2 growth was 8.6% in June, far brisker than the 8.2% economists expected and above the top-end of the range.
Some were skeptical that the RRR cut will be effective. “The reality is that the more China cuts the RRR, the more banks hoard that liquidity,” Manulife’s Sue Trinh said. “It’s not going to the real economy.”
Others were a bit less fatalistic. “With the slowdown, China has to take up the baton and ease both monetary and fiscal policies [and that’s] definitely good for risky assets,” Saxo’s Peter Garnry remarked. Kelvin Wong, at CMC markets in Singapore, called the apparent urgency of the move “rather significant given the bloodbath in China Big Tech this week.” (On Thursday, I gently suggested Xi may want to stop engineering bear markets in Hong Kong.)
Commenting further Friday, the PBoC pledged more support for small and medium-sized enterprises, green development, and technological innovation. Monetary policy, the statement said, will “create a suitable financial environment for high-quality development and supply-side structural reforms.”
In an amusingly blunt take on the state of the economy, Manulife’s Trinh said simply, “GDP will be what the CCP wants it to be.”
