FX Spotlight | RMB: Possible RRR cut | Article – HSBC VisionGo
- China’s State Council meeting on 7 July opens the door for a possible targeted RRR cut in the near term, in our economists’ view
- We believe the divergent monetary policy between China and the US has been a new normal
- A narrower RMB yield advantage in 2021 is a key reason behind our view that USD-RMB will gradually be higher in 2H
On 7 July, China’s State Council mentioned that it will use multiple monetary policy tools such as RRR cuts in a timely manner
The press release from China’s State Council meeting on 7 July suggests that the authorities will use multiple monetary policy tools such as reserve requirement ratio (RRR) cuts in a timely manner to further enhance financial support to the real economy, especially small and mediums-sized enterprises, and to steadily lower their comprehensive financing costs. Meanwhile, the State Council stresses that the use of monetary policy tools should be based on the principle of maintaining the stability and effectiveness of monetary policy, and avoiding “flood-like” massive stimulus.
A RRR cut over the near term is possible, which will likely be a targeted one aiming to support small businesses
This is the first time in more than a year since the State Council mentioned using RRR cuts as one of the monetary policy tools. In our economists’ view, this opens a door for a possible RRR cut in the coming months, if not weeks, and it is more likely that the cut is a targeted one with the aim of supporting small businesses. Our economists also expect its impact on overall liquidity conditions and credit growth to be limited, while the People’s Bank of China’s (PBOC) policy stance is still to strike a balance between growth and leverage stabilisation.
A (targeted) RRR cut, if delivered, may not trigger significant RMB weakness, in our view
In our view, the divergent monetary policy between China and US has been a new normal, and a main driver for USD-RMB in recent years. A narrower RMB yield advantage in 2021 is a key reason behind our view that USD-RMB will gradually trade higher in 2H. However, the absolute yield advantage of the RMB is still high at the moment. Hence, if markets start to price in a more accommodative stance of the PBOC or when a (targeted) RRR cut is delivered, it may not trigger significant RMB weakness. Rather, it should serve to slow down the RMB’s outperformance, in our view.
Meanwhile, the PBOC’s FX policy stance has remained broadly unchanged, in our view. In its recent monetary policy committee statement (released on 28 June 2021), the PBOC pledged to continue exchange rate flexibility and keep the RMB at a reasonable equilibrium level.
The broad USD should begin to bottom in the months ahead when the Fed starts tapering
In the bigger picture, a higher USD-RMB has played into our thinking that the broad USD should begin to bottom in the months ahead. After all, the RMB’s performance is a key determinant of the broad USD overall. Our long-standing view has focused on the actual start of the Federal Reserve’s (Fed) tapering being supportive for the USD, especially those major central banks that could be expanding their balance sheets in contrast to the Fed or are have monetary policy shifting in a different direction.
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This report is dated as at 08 July 2021.
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