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20 Apr 2015
PBoC’s surprising RRR cut fuelling growth related concerns – MP
FXStreet (Barcelona) - Dean Popplewell, Director of Currency Analysis at MarketPulse, shares three different perspectives of the PBoC’s surprising 100bp RRR cut.
Key Quotes
“The surprise cut, and more specifically the depth of it, is considered significant from three different perspectives.”
“First, it highlights that Chinese monetary policy easing has yet to gain significant traction and the primary reason why policy makers have been required to be “bold” and aggressive. Nevertheless, the surprise move gives the PBoC the latitude to go deep again if required next time.”
“Second, the aggressive positioning by the PBoC would strongly suggest that China’s growth could very easily slip beyond the stated objective of “around” +7% while even acknowledging the growing risks of low inflation. Perhaps the world’s second largest economy is in more trouble than first thought?”
“Finally, from a global perspective, it hardens the Chinese government’s argument to keep CNY/CNH stable as opposed to seeing it depreciate further. The RRR cut in theory should be injecting more liquidity than an expected FX outflow (or declining FX reserves). This should also allow the PBoC flexibility to intervene in order to keep their currency stable.”
“The big winners in the reserve ratio cut will be banks. Analysts are estimating that this reserve ratio cut can support bank earning’s by as little as +2.7% and as much as +4.5%. The cuts will allow banks to free out the cash from deposit accounts and invest in higher yielding loans. The PBoC cut is also lowering the funding cost to banks. Banks can get capital more cheaply from deposits rather than getting short-term loans from the central bank.”
Key Quotes
“The surprise cut, and more specifically the depth of it, is considered significant from three different perspectives.”
“First, it highlights that Chinese monetary policy easing has yet to gain significant traction and the primary reason why policy makers have been required to be “bold” and aggressive. Nevertheless, the surprise move gives the PBoC the latitude to go deep again if required next time.”
“Second, the aggressive positioning by the PBoC would strongly suggest that China’s growth could very easily slip beyond the stated objective of “around” +7% while even acknowledging the growing risks of low inflation. Perhaps the world’s second largest economy is in more trouble than first thought?”
“Finally, from a global perspective, it hardens the Chinese government’s argument to keep CNY/CNH stable as opposed to seeing it depreciate further. The RRR cut in theory should be injecting more liquidity than an expected FX outflow (or declining FX reserves). This should also allow the PBoC flexibility to intervene in order to keep their currency stable.”
“The big winners in the reserve ratio cut will be banks. Analysts are estimating that this reserve ratio cut can support bank earning’s by as little as +2.7% and as much as +4.5%. The cuts will allow banks to free out the cash from deposit accounts and invest in higher yielding loans. The PBoC cut is also lowering the funding cost to banks. Banks can get capital more cheaply from deposits rather than getting short-term loans from the central bank.”