China Cen­tral bank sends clearer mon­e­tary ac­com­mo­da­tion sig­nal

The Pak Banker - - 6BUSINESS -

The Peo­ple's Bank of China an­nounced a 50-ba­sis-point re­serve re­quire­ment ra­tio cut for bank de­posits on Mon­day night, tak­ing the sys­tem av­er­age from 17 per­cent to 16.5 per­cent, re­leas­ing around 700 bil­lion yuan in base money sup­ply on our es­ti­mates.

The cut was timed to main­tain ad­e­quate liq­uid­ity con­di­tions in the face of on­go­ing cap­i­tal out­flows, lower short­term rates some­what to counter their re­cent rise with the au­to­matic with­drawal of sig­nif­i­cant short-term liq­uid­ity, post-Chi­nese New Year, and send a clearer sig­nal of mon­e­tary pol­icy ac­com­mo­da­tion now that ex­change rate con­cerns and pres­sures have eased com- pared with ear­lier this year.

Ad­di­tional RRR cuts have been ex­pected and needed for a while to off­set size­able yuan de­pre­ci­a­tion-fanned cap­i­tal out­flows since last Oc­to­ber's RRR cut. We es­ti­mate non-FDI cap­i­tal out­flows stayed high at around $160 bil­lion in De­cem­ber and Jan­uary.

How­ever, the cen­tral bank has un­til now been re­luc­tant to de­liver, pre­fer­ring to use shorter liq­uid­ity pro­vi­sion­ing or in­ter­est rate tools such as Stand­ing Lend­ing Fa­cil­i­ties and Medium-term Lend­ing Fa­cil­i­ties in­stead, for fear of fur­ther ag­gra­vat­ing yuan de­pre­ci­a­tion pres­sures. Now that ex­change rate con­cerns and pres­sures have eased some­what ver­sus the Chi­nese New Year, the PBOC ap­pears to be send­ing a clearer sig­nal of mon­e­tary pol­icy ac­com­mo­da­tion. Even be­fore G20 fi­nance min­is­ters and cen­tral bank gov­er­nors' calls last week, the Chi­nese govern­ment had been in­di­cat­ing that it would be adopt­ing more ex­pan­sion in fis­cal and mon­e­tary poli­cies to sup­port growth.

De­cem­ber's Eco­nomic Work Con­fer­ence laid out a clear eas­ing bias for China's 2016 pol­icy plans. We ex­pect more de­tailed mea­sures to come, in­clud­ing the new bud­get to be un­veiled at the an­nual Na­tional Peo­ple's Congress this week­end, on the mon­e­tary, fis­cal and struc­tural fronts.

As Gov­er­nor Zhou Xiaochuan re­it­er­ated last Fri­day, there will be more pol­icy eas­ing to come, but the PBOC does not in­tend to let its cur­rency de­pre­ci­ate sharply and will man­age its ex­change rate ref­er­enc­ing the bas­ket while con­sid­er­ing dol­lar-yuan move­ments. We still see the PBOC cut­ting the RRR mul­ti­ple times by a to­tal 300bp cuts and cut­ting bench­mark rates twice more (tak­ing the 1-year de­posit and lend­ing bench­mark rates to 1 per­cent and 3.85 per­cent, re­spec­tively) this year.

While bench­mark in­ter­est rates were not cut on Mon­day, per­sis­tent de­fla­tion­ary pres­sures mean that real in­ter­est rates re­main too high, push­ing up cor­po­rates' debt ser­vic­ing bur­den and risk­ing pas­sive mon­e­tary tight­en­ing. We main­tain our view that the RMB will only be al­lowed to de­pre­ci­ate by a mod­est 5 per­cent against the US this year, leav­ing it at 1: 6.8 by the end of 2016.

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