PBoC surprised markets and us by announcing a 50bp reserve ratio cut, effective from 5 December. Today’s reserve ratio cut marks the official start of China’s monetary easing, in response to the noticeable slowdown of both the latest inflation and growth data. More reserve ratio cuts should follow in the coming months, but the PBoC will likely keep the interest rate unchanged until inflation slows to below 3%. This, plus tax cuts and fiscal spending should help stabilize China’s GDP growth to around 8.5% next year.
Facts
After the close of Mainland markets today, the PBoC announced a 50bp reserve ratio cut across all banks, effective from 5 December. This is the first reserve ratio cut since twelve consecutive reserve ratio hikes in most recent tightening cycle, and takes the reserve ratio to 21% for all big banks and 19% for smaller banks. Today’s move will inject approximately RMB400bn of liquidity into China’s banking system.
Implications
The latest data prints suggest that both inflation and growth are slowing at a noticeable pace. The final HSBC PMI and official PMI (to be released on 1 December) are likely to show further signs of cooling. The flash HSBC PMI dipped to 48 in November, its lowest level since March 2009. This suggests that GDP growth may fall below 8.5% in the coming quarters, in response to the lagged impact of credit and ongoing property tightening measures, as well as external headwinds. Meanwhile, inflation is also easing at a faster than expected rate. November’s HSBC flash PMI saw both its input and output price sub-indices fall by around 10ppts to 43.2 and 44.8, respectively, marking the first below 50 reading since mid-2010. All these call for more aggressive easing.
At the same time, the PBoC is getting ready to inject liquid to offset the possible capital outflows caused by the smaller amount of PBoC bills due to mature in its open market operations over the course of the next month. The PBoC’s forex purchase position fell by the RMB25bn last month in tandem with the European debt crisis and renewed expectations of renminbi depreciation.
Today’s move marks the official start of an across-the-board easing policy stance for the PBoC. We expect more quantitative loosening to come in the coming quarters in the form of additional reserve ratio cuts and a larger new loan quota. But the PBoC will likely keep the policy rate unchanged until inflation slows to below 3%. Monetary easing, tax cuts and fiscal spending should all help to stabilize China’s GDP growth to around 8.5% next year.
Bottom line: Today’s surprise reserve ratio cut marks the start of an across-board easing policy for China. This, plus tax cuts and additional fiscal spending should help keep China on track for a soft-landing.
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HSBC Global Research