China: RRR cut was not surprising - TDS

Analysts at TDS suggest that China’s weekend RRR cut was not surprising given slowing in monetary aggregates and forward looking indicators.

Key Quotes

“China’s cabinet had also strongly hinted at such a move last week. In the event the RRR was cut for large commercial banks by 0.5%, effective July 5, freeing CNY 500bn. RRR cuts for smaller banks are estimated to free up around CNY 200bn.”

“Large banks will be directed to use the CNY 500bn for debt to equity swaps while the CNY 200bn will be used for funding small and medium sized enterprises. The moves also come in the wake of further pressure on Chinese equities and ratcheting up of trade tensions.”

“The move is line with China’s policy of targeted easing in an attempt to avoid a further build-up of leverage. The fact that some of the liquidity is aimed at debt to equity again highlights China’s peculiar way of deleveraging ie issuing more equity rather than cutting down on debt. Market impact should be limited but it’s worth noting that the CNY CFETS has fallen from two-year highs as China appears to be allowing some relative CNY weakness.”