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RRR Decision: One-off Cut Or Start of a Loosening Cycle?

CHINA
  • Monday morning, the PBoC decided to cut the RRR (for major banks) by 50bps to 11.50%, its second cut this year (last one was in July).
  • The deceleration in Chinese economic activity, the bearish momentum in risky assets (especially equities) and the CNY strength were all factors pricing in a potential cut from Chinese officials to stimulate the economic outlook.
  • The chart below shows that the policy rate differential (FFR vs. China RRR) has been a strong driver of USDCNY in the past cycle, and that the constant CNY appreciation has led to a significant divergence between the two times series in the past 18 months.
  • We previously saw that the Chinese Yuan has been mainly driven by central banks’ assets growth differential in the past two years. While Fed assets have more than doubled since the Covid19 shock, PBoC assets have been nearly ‘unchanged’.
  • Hence, yesterday's cut questions China’s policy outlook: is it just a one-off cut or should we expect China to loosen more in the coming months?
    • On one hand, the elevated inflationary pressures, with China PPI standing at a 26-year high, should limit the easing policy as further cuts could lead to an overheating economy.
    • On the other hand, an easing policy could bring back confidence on Chinese risky assets, which have been under pressure since February.

Source: Bloomberg/MNI

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