China cut the reserve requirement ratio for all banks by 25bps on Friday, in a widely expected move.
Some banks will enjoy a 50bps reduction. All told, the cut will release 530 billion yuan of liquidity, far short of the 1.2 trillion yuan an across-the-board 50bps move would’ve unleashed.
The cut was well telegraphed even as telegraphed PBoC actions go. Officials have nodded at additional easing for months, and the State Council on Wednesday said an RRR cut would be delivered “at an appropriate time.” The average lag between State Council pronouncements and PBoC action is around five days (figure below).
Earlier Friday, China eschewed an MLF cut to the chagrin of some market participants, many of whom are anxious for policymakers to pair actions with words.
But the lack of a policy rate reduction meant the RRR cut was a lock. “The State Council didn’t mention a rate cut to begin with so there isn’t too much of a let down today,” one mainland fund manager said, of the unchanged MLF. “There’s a 100% chance of an RRR cut before Monday,” he added.
Beijing will release Q1 GDP data early next week, alongside activity data for March. The economy is still laboring under Xi’s (now wholly quixotic) “COVID zero” strategy despite tens of thousands of new daily cases. The Shanghai lockdown is viewed outside of China as an anachronism.
“The PBoC realizes the futility of cutting rates during a lockdown as policies incentivizing lending will have minimal short-term positive impact on activity so long as mobility restrictions remain in place,” SPI Asset Management’s Stephen Innes said Friday, referencing the unchanged MLF rate. “However, the optimistic take is that once these restrictions end, the government will push spending hard to reach its GDP target.”
Credit growth bounced back in March and consumer prices are very subdued. The latter is good, but also bad to the extent it reflects lackluster domestic demand. Note that imports actually fell in March as COVID containment measures curtailed activity. It was the first drop in imports since August of 2020 (figure below).
On Monday, March’s activity data may show retail sales fell from the same month last year. It would mark the first decline since the summer of 2020.
Considering the headwinds, it’s far from clear that Friday’s RRR cut, the third in 10 months (figure below), will be viewed as anything like sufficient.
Analysts had expected a 50bps, across-the-board move, so it’s conceivable the 25bps broad cut will be seen as too timid, despite the greater relief on offer for some banks. Invariably, some analysts will say the smaller move leaves Beijing with more “room” to cut once the lockdowns are lifted.
Separately, the PBoC pledged to use relending, rediscounting and “other” tools to help banks support the logistics sector. Loan extensions will be granted to truck drivers and more credit will flow to aviation firms.
On Thursday, the PBoC “asked” (and the scare quotes are there for a reason) banks not to suspend loans “blindly” to borrowers in industries impacted by the virus. In Shanghai, large banks have offered residents the option to delay mortgage payments.
Monetary easing from the PBoC contrasts with panicked tightening efforts across developed economies, widening the policy divergence. That’s unlikely to undercut the yuan, though, given current account strength.
