China: PBoC cuts the reserve requirement by 100bp in aggressive easing move

Peoples Bank of China (PBoC) on Sunday announced that the reserve requirement ratio (RRR) for commercial banks will be cut by 100bp effective from 20 April. For large commercial banks the RRR will now be 18.5%.

• Although PBoC was widely expected to ease, the 100bp cut in the RRR must nonetheless be regarded as an aggressive easing move as most including ourselves expected PBoC to cut the RRR in 50bp steps. In addition to today’s cut in the RRR, it is also worth noting that PBoC since mid-March has gradually cut its reverserepo- rate from 3.75% to 3.35%. PBoC’s reverse-repo is used to inject liquidity in connection with twice- weekly auctions (see chart).

• The cut in RRR underscores that in the past month PBoC has increasingly shifted focus to injecting liquidity into the interbank market and guiding interbank interest lower. The two cuts in the largely symbolic leading deposit and lending rates in November last year and late February this year have proved largely infective easing measures, as the money market actually edged higher in the wake of the rate cuts (see chart below). However, in the past month money market rates have declined sharply.

• China on Saturday released the official house prices for March. China does not release a nationwide house price index, but our calculations based on data for the 35 largest cities show that the decline in house prices in March accelerated to 5.7% y/y from 5.3% y/y in February. However, seasonally adjusted house prices only declined 0.1% m/m in March after declining 0.3% m/m in the previous month. Hence, the overall picture is that the decline in house prices has eased in recent months. The most severe price declines were in the autumn last year (see chart below)

• In light of the recent weak data we expect PBoC to continue to ease in the coming months. In our current forecast we have one more 50bp cut in the RRR, but today’s aggressive move suggests the RRR will be cut by more. We also expect the leading deposit and lending rate to be cut by another 25bp, but continue to underscore that for the economy it is more important that PBoC cut the RRR and its reverse-repo rate to push money market rates lower.

• Regarding CNY we do not expect the Chinese government to start targeting a substantially weaker CNY to support growth. This policy is, in our view, supported by an increasing trade balance surplus and a capital account that remains relatively closed.

• The more aggressive easing measures should add to a moderate recovery in China in H2 15. However, the keyword here is ‘stabilisation’ rather than ‘substantial recovery’. China remains in a ‘managed deleveraging’ process, where credit growth is unlikely to rebound substantially.