Moments ago the number of central banks who have eased so far in 2015, most of them unexpeted, rose by one more from 15 to 16, when in addition to Singapore, Europe, Switzerland, Denmark, Canada, India, Turkey, Egypt, Romania, Peru, Albania, Uzbekistan and Pakistan, Russia and, most recently, Australia it was China's turn to do what so many banks had said was inevitable, even if meant backtracking on all its blustery talk about limiting bad debt expansion, and cut its reserve requirement ratio for bank by 0.5% effective Thursday, to boost liquidity and support the economy.
The full statement, google translated:
People's Bank of China decided to cut financial institutions RMB deposit reserve ratio by 0.5 percentage points since February 5, 2015. Meanwhile, to further enhance the ability of financial institutions to support structural adjustment, increase small and micro enterprises, "three rural" and support the construction of major water projects, small and micro business loans accounted for directional drop quasi standard of urban commercial banks, additional non-county rural commercial banks decreased by RMB deposit reserve ratio by 0.5 percentage points, the Agricultural Development Bank of China to reduce extra RMB deposit reserve ratio by 4 percentage points.
People's Bank of China will continue to implement a prudent monetary policy, maintain an appropriate degree, guiding monetary credit and social financing scale steady moderate growth, and promote the smooth operation of economic health.
Following the rate cut, China's RRR drops from 20% to 19.5%, and one has to wonder just how bad things are at China's Agri Bank if it has to be "stigmatized" by the central bank, i.e., explicitly noted that it needs more liquidity than all its peers, with an additional rate cut.
Some initial reactions, via BBG:
Chinese stocks, bonds and commodities will rally on Thursday after the central bank’s “surprise” cut in reserve-requirement ratios, while the yuan will come under pressure and may require intervention, according to Hao Hong, head of China research at Bocom International in Hong Kong. “We should see an sizable lift in stocks, bonds, and to a certain extent, commodities,” Hong said. “Some pressure will be on the yuan although the PboC will intervene." For rest of 2015, monetary loosening will be the theme though it could be less than what the market wants.
"Rather than get caught flat-footed as Chinese policy makers were in 2014 as economic data collapsed, 2015 will see a much more aggressive PBOC and government, which should keep CNY support,” Peter Rosenstreich, head of market strategy at Swissquote Bank, writes in note.
PBOC’s decision to cut RRR likely prompted by weak Jan. HSBC Services PMI: Swissquote; says move will be positive for regional FX and commodity prices
A third take sees the RRR-cut not as a stimulus as much as an attempt to offset the recent liquidity outflows:
People’s Bank of China decision to cut RRR by 0.5 percentage points today “should be seen as a liquidity management tool rather than a stimulus,” Andrew Polk, Beijing- based economist with the Conference Board, says in an e-mail.
Monetary policy through this year likely to see “strange mix of liquidity support and an attempt to lower financing rates for SOES and local governments,” Polk says. "This combination of lower supply of liquidity from capital outflows and higher liquidity demand from the Chinese New Year likely led the central bank not to take any chances as far as reliving a liquidity crunch like in June 2013."
The market response was quick, with all risk assets rising, if not as much as some had hoped, and for once, gold did not suffer a slamdown on the news that yet one more bank is injecting even more liquidity into the market. We expect the SHCOMP to surge to new highs in tonight's trading session, which having become a clear bubble will present a fresh challenge to the PBOC because while it wants to support its banks it does not necessarilt want to overinflate the equity bubble, which as we have commented previously, is where all the housing bubble addict have migrated to ever since China's housing bubble burst.
Finally, as BBG noted:
- OFFSHORE YUAN ERASES GAINS TO 6.2588 VS USD AS PBOC CUTS RRR
This too will be frowned upon by the Central Bank, considering the number of voices that have emerged in the past few weeks calling a Chinese devaluation (see for example "As China's Offshore Yuan Crashes To A 2 Year Low, Beijing Warns Its Citizens: "Don't Buy Dollars"") may be on deck, and the PBOC stern attempt to refute them all.
Naturally, once this latest quantized attempt to boost the economy fails, those same voices will merely reassert that the only way China can truly return to export competitiveness in light of the soaring dollar to which it is pegged, is to proceed with a wholesale currency devaluation. Stay tuned.