VIEW: Societe Generale: RRR Cut Opens Door To More Easing

In the wake of Monday’s announcement re: the RRR cut, Societe Generale note that “just like the cut in July, some of the RRR liquidity will be used to replace some of the CNY950bn of MLFs that are due to expire on 15 December. However, this time we expect the PBoC to roll over a higher share of the expiring MLFs than it did in the summer, thus effectively providing more liquidity support.”

• “In our view, eased supply constraints (e.g. easing power crunch) are no offset to decelerating demand (caused by housing), and marginal tweaking (including relaxations to property funding) is not enough to cushion the slowdown in the broader economy. While one RRR cut is far from enough to resolve any of the downward pressure on China's economy, we believe it could open the door to other, more impactful easing measures.”
• “The statement released following the cut was intentionally neutral, reiterating PBoC's prudent stance and labelling the RRR cut as part of conventional liquidity operations. In our view, the PBoC used this rhetoric to avoid giving the impression that it was giving up on making the economy less reliant on easy credit. However, we believe this RRR cut is policy easing and that the policy easing is just as real as the economic slowdown.”
• “The Politburo meeting which also took place today sounded decidedly more dovish and gave a clue as to what to expect from the Central Economic Work Conference (CEWC), due to take place next week. In the communiqué, policymakers stressed that “stability is key”, suggesting that stabilising growth is now given higher priority. Policymakers pledged to expand aggregate demand, by supporting consumption and effective investment. Regarding the property sector, the statement omitted to say that “housing is living, not for speculation”. Of course, the omission does not mean that Beijing is going to revert its course on housing deleveraging completely, but it is a sign that downward pressures on growth from the housing slump has reached policymakers' pain threshold. In particular, the statement called for support to structural housing demand, suggesting policymakers do not want to overtighten the sector.”
• “The CEWC is not the venue for any announcement of specific easing measures, but a more dovish tone, if confirmed, would increase the probability of all the moves in our forecast. In terms of monetary policy, we expect another 50bp RRR rate cut and a 10bp policy rate cut in H122. On the fiscal side, the focus will be on tech and green infrastructure, with tax and fee cuts targeting manufacturing and SMEs (an option that is already being studied by the tax authority), but also on social welfare spending and consumption stimulus. We believe these measures are needed to help stabilise economic growth in H122 and avoid a hard landing.”