First US tariffs to take effect on China goods

DESPITE the softer-thanexpected US restrictions on Chinese investments, the tariffs on US$ 34 billion of Chinese goods has taken place last week.

We view the latest ‘ targeted’ RRR cut to support structural deleveraging and small businesses as another PBoC easing move to stabilise growth amid a credit crunch.

Given headwinds from further regulations and tariffs, we expect more liquidity loosening and policy fine-tuning in the second half (2H), including two more 50bps targeted RRR cuts.

The People’s Bank of China ( PBoC) announced on June 24 a 50bps cut in banks’ reserve requirement ratios, effective July 5. The move released about 700 billion yuan of liquidity.

While the 50bps cut applies to nearly all commercial banks, the PBoC set some ‘ targeted’ uses of the liquidity to support debttoequity swaps to “prudently push forward structural deleveraging”, and funding for smalland micro- sized enterprises (SMEs).

The RRR’s cut follows through on the State Council’s June 20 notice, urging more measures to support the financing of small businesses.

The RRR cut comes at a time when a ‘credit crunch’ occurs, driven by sustained efforts by several government bodies to tighten controls over shadow credit activity, local government debt and property-related financing. This ‘credit crunch’ is starting to have visible effects on the economy.

With the ongoing theme like the trade war tension and moderating growth still playing out, particularly in view of more defaults and rising corporate financing costs, we expect China’s central bank to have to shoulder more of the burden of the policy adjustment to stabilise growth.

In our view, the RRR cut confirms that the PBoC’s stance has shifted to neutral with an easing bias. That said, we believe the government still holds firm to its stance on ‘structural deleveraging’, which refers to the tightening of credit lending to major corporates and debtors which was highlighted by President Xi Jin Ping in earlier conferences (a concept that was first highlighted by President Xi in early April).

Such deleveraging phase could have an overall impact on China economy pace but we reckon China has the capacity and bullet to withstand any economic shock.