China’s RR reminds the economy is still fragile Reuters

Authors: Mark Jones and Tom Arnold

LONDON (Reuters)-China’s decision on Friday to provide 1 trillion yuan ($154 billion) in funding to its economy reminds investors that even the largest economy may need to cheer up occasionally during the coronavirus pandemic continued.

In one of the landmark moves on Friday night, the People’s Bank of China (PBOC) lowered the reserve requirement ratio (RRR) by 50 basis points (bps).

This is the first step since the rapid spread of COVID across the world in April last year. Equally important, it ended the nine-month gradual tightening of the authorities’ desire to prevent credit growth from spinning out of control.

“We think this is a sign of a shift from countercyclical tightening to easing tendencies,” Morgan Stanley (NYSE:) said, “In view of the recent resurgence of Covid, supply chain disruptions and a further slowdown in domestic consumption, growth has stalled.”

Manik Narain, head of strategy for emerging markets at UBS, said the move is a fine-tuning, not a sharp turn for the People’s Bank of China. About 400 billion yuan of the estimated value of 1 trillion yuan of deposit reserves may be used to repay the existing “medium-term borrowing facility” funds of the People’s Bank of China, and the 70-750 billion yuan of taxation will soon expire.

However, from a global perspective, this is a sharp reminder that for anyone, taking COVID support measures will not be smooth sailing.

“China is first in, first out (with the support of the COVID policy)” Narain said. “So if you consider global importance, then the message here may be that the People’s Bank of China indicates that the economy is somewhat fragile and that inflation is unlikely to cause much damage in the medium term.”

Reply

The move by the People’s Bank of China was carried out amid the rapid re-acceleration of global COVID cases.

But at the same time, the Fed is weighing when to reduce the scale of asset purchases and the near-zero interest rate implemented last year, while emerging market heavyweights such as Brazil, Mexico, and Russia are already raising interest rates to cope with soaring inflation.

The bond market seems to be responding to the shift in China’s interest rate cycle by pricing lower interest rates in the medium term. Even before the announcement of the deposit reserve ratio, there were signs earlier this week that interest rates would be cut, causing China’s 10-year treasury bond yield to hit its biggest weekly decline this year.

Many China observers believe that pent-up COVID demand has now peaked and its growth rate will now slow down, dragged down by weak exports, soaring producer price inflation and Beijing’s continued suppression of the real estate market.

It is expected that the economy will continue to grow by more than 8% this year, but compared with the government’s moderate growth target of more than 6%, it shows that there is little pressure to tighten easing.

Gustavo Medeiros, deputy head of research at Ashmore Group, said: “We expect fiscal policy to continue to focus on specific industries that are most affected by the pandemic, such as small companies. We also expect the real estate market’s macro Prudent austerity will continue to exist.”

UBS’s Narain said that another gain from Friday’s move is that other large emerging markets may see it as a sign that their own economy is about to emerge.

“If I am the governor of the central bank of Mexico or Brazil and have raised interest rates, this also tells me that the (interest rate) rate hike cycle may be very short.”

($1 = 6.4795 renminbi)

(Additional graphics provided by Karin Strohecker edited by Mark Potter)