VIEW: J.P.Morgan On Matters Surrounding The Potential, Impending RRR Cut

J.P.Morgan note that they had previously “anticipated a 50bp RRR cut in Q421, but removed this call as the PBoC clearly indicated a strong institutional preference for targeted instruments (re-lending to support de-carbonization, clean coal and SMEs announced since September) and reluctance for RRR cuts and rate cuts. Premier Li’s statement suggests that the voices for RRR cuts from other government agencies may have prevailed, and there may not be long to wait for an RRR cut. One possibility is a 50bp RRR cut around mid-December, as CNY950bn MLF will mature on December 15 and can at least be partly replaced by the RRR cut. However, even if an RRR cut takes place, the economic impact will depend more on the dynamics of TSF growth.” Their forecast of TSF growth at year-end is 10.5% (vs. 10.0% in October) and 10.0% at the end of 2022, for which they see limited upside. “In addition, the average RRR in the banking system now stands at 8.9%, and the room for further RRR cuts has become constrained.”

• They believe that “the property market remains the biggest near-term risk.” But “believe RRR cuts will not be sufficient to stop the downward momentum and will require supplementary policy measures. There are signs that housing policy is being fine-tuned: (i) after the recent relaxation in first-home mortgage loans, the government specified that it would “meet mortgage demand for upgraders”; and (ii) support for “reasonable release of M&A loans” has been raised by the CBIRC. The case of Evergrande may increase policymakers’ concerns about spillovers and lead to further policy fine-tuning to avoid tail-risk scenarios.” However, they do not expect “the property market to bottom out soon, as “five red-lines” policy (three on developers’ debt financing and two on banks’ exposure to the property sector) will stay unchanged, plus there is the impending risk of the expansion of property tax in 2022.” In their baseline scenario, “the property slowdown will continue for another 1-2 quarters before stabilizing at lower levels.”