China Macro: State Council signals RRR cut – Following its meeting on Wednesday, China’s State Council issued a statement suggesting that the People’s Bank of China could deploy monetary instruments, such as cuts in certain reserve requirement ratios (RRR) for banks, to reduce corporate financing costs, particularly those for SMEs. Over the past years, such signals given by the State Council are typically followed by the PBoC, so an RRR cut in the coming weeks is now quite likely. Such a move would mean a return to the piecemeal monetary easing approach that policy makers have adopted before. This should not be seen as the start of an aggressive easing cycle, given that policy makers are likely to stick to their overall goal of containing overall leverage (by capping overall credit growth to nominal GDP growth). This move would give some breathing space to companies that were faced with rising interest rates driven up by a rise in cost push inflation. Following the State Council’s signal, China’s 10-year government bond yield dropped by around 10 bp.
The timing of the signal also seems related to the weakening in growth momentum, with for instance the June services PMIs coming down sharply – partly reflecting regional virus flare-ups and a retightening of mobility restrictions that further delayed the recovery in (services) consumption. Previously, the authorities had already reacted to the rise in cost push pressures (mainly driven by commodities, but also by various supply bottlenecks) by taking measures to cool domestic commodity markets (see the China part in our June Global Monthly). More broadly, since end 2020, they had shifted policy priority from macroeconomic stabilisation following the pandemic shock to financial de-risking, meaning that China’s credit cycle had already started turning. Moreover, the authorities have continued with curtailing shadow banking and have intensified a crackdown on fintech firms, bitcoin and online platforms.