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2H Liquidity Challenge Points To RRR Cuts

CHINA

The second half of the year will see challenging liquidity for the Chinese economy.

  • The medium term lending facility used by banks has significant maturities in the second half, and a significant redemption schedule in bonds.
  • Recent data shows too significant outflows in China related ETF’s with the Vanguard FTSE EM ETF (tk VMO) reporting the largest outflows in 4 years of over US$500 (per BBG).
  • Liquidity will remain a key focus for authorities in the second half of the year.
  • With greater autonomy given to the regions in the recent plenum, it is expected that issuance could reach as much as CNY1tn in this period.
  • To support liquidity Chinese authorities have been pro-active already with multiple policy changes (cut in repo rate and reduction in 1 year policy rate).
  • The next policy announcement is likely to be a reduction in the Reserve Requirement Ratio for banks. A cut of 25-30 bps in the RRR could release over CNY1tn of liquidity according to estimates.
  • This liquidity would help stabilize financial markets and allow for the issuance schedules to proceed, allowing regions to prioritize the funding for 2025.
  • Whilst most commentary on Government Bond yields has been to highlight concerns as to their decline, ironically those concerns could be a support to the regions in 2H 2024.
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