Research Blog
Further loosening from the PBOC on the cards
For more details, please contact:
Mingchun Sun
(852) 2773 8751
mingchun.sun@hk.daiwacm.com
Kevin Lai
(852) 2848 4926
kevin.lai@hk.daiwacm.com
Fei Xue
(852) 2773 8767
fei.xue@hk.daiwacm.com
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1 December 2011
Summary
- The PBOC’s surprise announcement yesterday of a 50bp cut in the required reserve ratio (RRR) was its first reduction of the current cycle.
- The move suggests that Chinese policymakers are increasingly concerned about the downside risks to growth.
- We now expect the PBOC to reduce the RRR by a total of 200bp over the course of 2012.
The PBOC’s surprise announcement yesterday of a 50bp cut in the required reserve ratio (RRR) was its first reduction following 12 hikes in the past two years. The benchmark RRR will drop to 20.5% (21% for large financial institutions and 19% for small- and medium-sized ones). This will take effect on 5 December 2011.
RRR and benchmark policy rates
Source: DEIC and Daiwa
We estimate that the latest RRR cut will release some Rmb396bn of liquidity into the banking system. M2 growth in October dipped to a ten-year low of 12.9% YoY. After this move, we expect the tight liquidity conditions in the banking system to ease, and thus banks’ lending capacity will improve.
The PBOC’s move signals that worries about an economic slowdown in such an uncertain global environment now override inflation concerns. Policymakers have shifted their focus to growth and they are open to stronger loosening measures if the euro area crisis spreads to Asia. In fact, China’s growth momentum has already decelerated markedly in the past few months. Our Daiwa China Momentum Gauge shows that only 4 out of the 20 indicators that we track exceeded their 12-month moving averages in the latest reporting period, while 14 out of the 20 indicators softened. Meanwhile, today’s official PMI fell to 49.0 in November from 50.4 for October, indicating the first month-on-month contraction in industrial activity since the Lehman crisis and highlighting the substantial downside risks to activity.
Yesterday’s announcement has significantly alleviated our concerns about a sharp economic slowdown. We estimate that new loans are likely to reach Rmb600bn in both November and December, leading to full-year loan growth of Rmb7.5tn for 2011. If this proves accurate, it would significantly reduce the risk of a hard landing in Q411. But economic indicators will deteriorate further in the next 3-6 months before the positive effects of the policy loosening begin to be felt. Given this, we now expect the PBOC to reduce the RRR by a total of 200bps over the course of 2012. But interest rate cuts are not likely, as real interest rates remain negative.
New loans
Source: CEIC and Daiwa
Mingchun Sun, Chief economist, Asia, ex-Japan
Kevin Lai, Senior economist, Asia, ex-Japan
Fei Xue, Economist
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