Societe Generale - Wei Yao, Claire Yeung
The PBoC decided to cut 50bps in the RRR for all banks, effective on 5th February. In addition, it also continues its selective easing strategy and deliver:
An extra RRR cut of 50bps for qualified city commercial banks and above-countylevel rural commercial banks, which accounts for less than 16% of overall banking sector liabilities. Qualified banks are those who have a certain portion of lending to small and micro-size enterprises.
Extra RRR reduction for one policy bank, the Agricultural Development Bank of China.
Overall, the estimated liquidity injected into the interbank market will probably amount to around CNY 600 billion if we assume two thirds of the commercial banks mentioned in bullet one meet the requirements.
Although the PBoC has been conducting reserve repos and all the other open market operations to pump in liquidity, interbank rates have not fallen notably or persistently. In part, the tightness in the markets has been exacerbated by IPOs in the pipeline and extra demand for liquidity ahead of the Chinese New Year.
Structurally, there is one critical argument for persistent liquidity support from the PBoC: official FX reserves are not growing any more. On contrary, the PBoC has been running down its FX reserves to limit yuan depreciation.
From another angle, cutting the RRR may also suggest a greater intention of the Chinese government to defend the stability of currency. We have written in details on the PBoC's FX policy choices (link) and expect continued currency stability. This RRR cut completely offset the liquidity draw-down resulted from currency intervention in December (and January) and may also be preparation for further intervention. Therefore it is the opposite to other central banks. Domestic easing measures do not necessarily lead to currency depreciation.
Since the cut is, to a large extent, aimed to offset capital outflows, we do not think the PBoC is shifting away from its measured easing mode.
However, for the sake of stabilising domestic liquidity and fighting off odds of a hard landing, the central bank will have to continue to offer more. We expect one more 50bps cut in RRR and one 25bps cut in the benchmark deposit rate in Q2, although the impact of the latter may be partly offset by further interest rate liberalisation.
JPMorgan - Marie Cheung
How much liquidity could be injected? Based on our estimate, it could inject a total of 650 billion yuan liquidity into the system, including 569 billion from the 50bp universal RRR cut, about 20 billion from the additional RRR cut for China Agricultural Development Bank and about 60 billion from the additional RRR cut for city and rural commercial banks.
The timing of the RRR cut is in line with our expectation (market consensus expects the RRR cut after the Lunar New Year). We predicted that the RRR cut may come before the Chinese New Year, citing three reasons: (i) the weak growth momentum in the near term and disinflation environment justify monetary easing including RRR cuts; (ii) the liquidity demand in the financial system, especially that the traditional channel of injecting liquidity via FX reserve accumulation has been absent in recent quarters; (iii) recent regulatory measures (e.g. tightened rules on margin finance and umbrella trust) have been helpful to contain the risk of liquidity spillover to the stock market. In addition, the recent wave of central bank easing may have played a role, but we think the above domestic factors are the main reasons behind the RRR cut today.
We expect further monetary easing in the coming months. In the very near term, we expect the PBOC will increase the magnitude of reverse repo operation before the Chinese New Year, to meet the seasonal high liquidity demand (such liquidity provision is only tentative and will be withdrawn after the Chinese New Year). We also expect one more rate cut of 25bp in 1Q (likely March) and a second universal RRR cut of 50bp in 2Q, supplemented by targeted measures like SLF, MLF, PSL and targeted RRR cuts to facilitate economic restructuring.
ANZ - Khoon Goh, Irene Cheung
We believe that part of the reason for the RRR cut is to alleviate tightened domestic monetary conditions. Increased capital outflows since late last year has seen USD/CNY trading at the top side of the trading band, and market expectation of yuan depreciation has increased. But the PBoC has resisted from depreciating the currency, opting instead to set the fix steady, whilst intervening in the FX market to cap the topside in USD/CNY. In December, the last data available, the PBoC sold around USD21 billion of USD. We suspect that intervention picked up in January. With the upcoming Chinese New Year festival, liquidity conditions risked becoming very tight -- hence the RRR cut.
The 50bp cut in the RRR is expected to inject RMB600 billion (USD96 billion) into the banking system. This will help replenish the yuan liquidity which the central bank has soaked up in the course of FX intervention. With today's move, our view is that the PBoC will be able to maintain their intervention effort without draining yuan liquidity and pushing up money market interest rates. Based on our estimated liquidity injection from the RRR cut, the PBoC could potentially intervene by as much as USD96 billion while keeping yuan liquidity steady.
We maintain our view that the authorities will not depreciate the currency, as that would risk even more capital outflows, which could prove to be destabilising. We expect the PBoC to continue maintaining stable fixes and intervene to cap the upside in USD/CNY. Today's fixing, which was 51 pips lower despite USD/CNY being near the top of the band, is a strong signal of the PBoC's resolve not to weaken their currency.
Goldman Sachs - Yu Song, MK Tang and Maggie Wei
The main rationale for the cut was likely the accumulating signs of weakness in the economy which include (1) official and HSBC manufacturing PMI data both weak at sub-50 level, (2) industrial profits data fell from -4% to -8% in December, (3) falling CPI and PPI inflation which indicate deflationary risks (it is not clear if the government has seen the official reading of the January CPI already, but we expect a drop to 1% yoy, the lowest reading since the GFC), (4) significant FX outflows which have contributed to tighter domestic liquidity conditions, and (5) NPL and default concerns. Many of these were contributed by tight financial conditions as a result of elevated real interest rates and rapid appreciation of the REER (real effective exchange rate). The softer equity market performance in recent days likely made this decision easier too, as the November-December run-up was probably viewed as excessive by policymakers.
The move will release a significant amount of liquidity which will help to ease financial market tightness. Equally important it sends a very strong signal of policy loosening. A full RRR cut is generally viewed as the most blunt tool in the monetary policy tool box. This will provide a boost to confidence which is likely positive for short term demand growth, and should also help reduce the risks of a protracted period of undesirably low inflation. We expect the 7-day repo rate to ease back down, perhaps to the 3.6%-3.8% range based on behavior following previous RRR cuts. Both the repo rate fix and CNY fix will be important clues to potential further moves and policymakers' intentions.
We expect further moves in the coming months, as Chinese policymakers often ease along multiple dimensions simultaneously:
More RRR cuts are likely. With policymakers having demonstrated a willingness to use broad RRR cuts, we expect to see more, though the next may come with a significant lag (likely Q2). If the government wants to offset the effects of FX outflows on domestic liquidity, another 50-75bp per quarter will be needed (by our rough estimate).
With inflation falling there is also a case to lower benchmark interest rates to bring down high real interest rates. The last cut in November was asymmetric (a bigger cut in lending rates than deposit rates), although we don't think that would necessarily be the case again. The timing of any benchmark rate cut will be data-dependent, but a cut before the end of the quarter is quite possible.
The government may allow the CNY fix to depreciate against the USD to ease pressures on exports growth, though we have only a very modest move (to 6.20 on a six-month horizon) in our baseline. A widening of the CNY band to ease the currency (under current circumstances, the spot would probably trade quickly towards the weak side of the band) is a real possibility but is not our baseline at this point.
Finally, other administrative measures supporting the property sector and infrastructure investments are also often used to as a part of the broad package.
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The above opinions are extracts from research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.
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(END) Dow Jones Newswires
February 04, 2015 21:04 ET (02:04 GMT)
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