No Greatly Anticipated RRR Cut From China, Just More Jawboning: Will It Be Enough

In the aftermath of China's worst manufacturing PMI since the financial crisis, which in turn sent the Shanghai Composite crashing to the "hard floor" level of 3500, below which the PBOC and Beijing officially are seen as having lost control, virtually every China expert and strategist rushed to defend China's policymakers (and its stock market) with predictions that an RRR cut as large as 100 bps is imminent, and would take place as soon as this weekend, a much-needed move to calm nerves that China is in control. This is what we said on Friday:

The sellside set the weekend stage with big hopes for a RRR cut as big as 100 bps which may be the catalyst for the next major leg lower because unless the PBOC delivers, the market will resume sliding on fears Beijing has finally given up on micromanaging and artificially pushing the stock market bubble higher. Case in point, via Bloomberg:

  • Julia Wang, Hong Kong-based economist at HSBC:
    • Economy’s recovery seems to have lost more momentum, reinforcing already weak market sentiment
    • This will weigh on economic activity and labor conditions in coming months
    • Expect further policy easing, including another 25 bp policy rate cut and 100 bp RRR cut in coming weeks
  • Zhu Qibing, Beijing-based analyst at China Minzu Securities:
    • Aug. flash factory PMI components reflect both weak domestic and external demand
    • Further currency depreciation may not be the solution to lift Chinese exports, according to their relationship in recent years
    • PBOC policy may not effectively transmit to real economy, but further RRR cuts needed to counter liquidity shortage
    • Expect RRR cut at end of 3Q
  • Jacqueline Rong, Beijing-based economist at BNP Paribas:
    • Aug. flash PMI data reflects slowing property investment and manufacturing activities; infrastructure spending may have yet to pick up this month
    • Slowing economic activity, together with equities’ performance, may risk 3Q GDP falling below 7%
    • 7-day repo rate edging higher this week even after PBOC injected large amount of cash via OMOs and MLF; this suggests capital outflows may be accelerating
    • Timing of another RRR cut is nearer, size of could 50-100 bps
  • Nie Wen, economist at Huabao Trust:
    • Yuan still has room to devalue as its REER is still relatively high vs other regional currencies
    • Rising capital outflows are not a result of weakening yuan, but rather expectations for slowing economic growth
    • PBOC easing is still much needed to counter the economic slowdown; another RRR cut may arrive as early as end of the month

Well, the weekend - traditionally the time when the PBOC announces any interest rate or RRR cuts - has come and gone, and... nothing. Which, as we further noted on Friday, was the biggest risk for Chinese stocks:

Why did China do nothing, knowing very well the world's spotlight was aimed squarely at it over the weekend to do something, anything, and intervene in a forceful manner thus halting the outright liquidation that has gripped not only Shanghai but all the world's other capital markets.

One explanation is that, as was revealed two weeks ago, China is modestly pulling out of the "plunge-protection" business, to see just how big the stock market fallout is/will be. Indeed, now that China is actively involved in the FX market on a day to day basis following the depegging of the CNY, it may have its hands full with micromanaging every downtick in both stocks and the Yuan.

Alternatively, China is just too confused and naive when dealing with market demands for an imminent bailout, as happened on Friday with Chinese stocks, which crashed nearly 5% in a clear signal that more has to be done, demands which were subsequently echoed in the US as well, as now it is Yellen's turn to "assure" markets that selling is meaningless, at least according to America's "most trusted personal finance expert" Suze Orman.

Or perhaps it is even simpler: it could be the China, approaching the end of its intervention firepower and also unwilling to go back to square 1 in the monetary intervention camp, namely rate cuts, will henceforth engage in what its western peers do all the time: jawbone, spread rumors, and otherwise intervene verbally and with promises but not with actual deeds. This may explain why this morning the WSJ dedicated an entire article to what everyone else had already known should happen over the weekend: an RRR cut. To wit:

The People's Bank of China is preparing to flood the country's banking system with new liquidity to boost lending, according to officials and advisers to the central bank, as a weaker currency could spur more funds leaving Chinese shores.


The step--which involves cutting the deposits banks are required to hold in reserve--would signal that the Chinese central bank's exchange-rate maneuvering in the past two weeks is backfiring, forcing it to resort to the same easing measures that so far have failed to help spur economic activity.


The move, which the people say could come before the end of this month or early next month, would involve a half-percentage-point reduction in the reserve-requirement ratio, they say, potentially releasing 678 billion yuan ($106.2 billion) in funds for banks to make loans.


It would be the third comprehensive reduction in the reserve requirement this year. Another option being considered at the PBOC is to only target the cut to banks that lend large amounts to small and private businesses—the ones deemed key to China’s future growth—though that strategy hasn’t proven effective in the past in channeling credit to those borrowers.

None of this should be news to anyone who has followed the Chinese stock market re-crash in the past month, where the entire 18% rebound has now been washed away, and where China is now the only world market supported by key support levels, both chartist and psychological. Thus there is one big problem with the WSJ story: not only is everyone aware of it, but everyone demands actions, not words, nor promises of a rate hike "before the end of this month or early next month", in order to prevent the SHCOMP from tumbling all support levels, and sliding back to its multi-year trading range of just around 2000. Should that happen, China will have bigger problems than just your plain-vanilla hard economic landing to worry about: it may be more concerned with civil disobedience and outright violence as tens of millions of "traders" suddenly feel betrayed by their government. Recall that as Nomura warned two months ago, a market crash "Poses Great Danger To Social Stability."

In other words, today's China open, and more importantly, close will may be the most closely watched yet. Because should the Chinese National Team prove too weak for the tsunami of selling now that the PBOC did not cut the RRR, and confirm that China is the first central bank to have lost control, then what happens in European and US markets after the China close could make last week's S&P decline seem like a walk in the park.