China: Expect 200bps more RRR cuts in 2019 – Standard Chartered

Analysts at Standard Chartered are expecting another 200bps of broad RRR cuts for the rest of 2019 by the PBoC after it announced a broad-based 100bps cut in the reserve requirement ratio (RRR) on 4 January.

Key Quotes

“This follows the 2 January relaxation of criteria for banks’ eligibility for targeted RRR cuts, aimed at supporting SMEs. According to the central bank, the broad RRR cut – of which 50bps will take effect on 15 January and 50bps on 25 January – will unlock CNY 1.5tn; net injection of long-term funding will amount to CNY 800bn, taking into consideration medium-term lending facility (MLF) maturing in Q1, the forthcoming targeted MLF (TMLF), and the relaxation of targeted RRR cut requirements.”

“The move confirms the easing bias of China’s monetary policy. The official manufacturing PMI dropped below 50 in December for the first time since July 2016. The government has pledged to strengthen counter-cyclical macro policies to contain downside risks.”

“We now expect another 200bps of broad RRR cuts for the rest of 2019 (300bps in total this year), allowing M2 to grow 8-9%, in line with nominal GDP. We previously expected a total of 200bps of RRR cuts in 2019. The PBoC’s balance sheet will likely shrink as the outstanding MLF balance declines; more RRR cuts are therefore needed to compensate for the erosion of the monetary base.”