FX Spotlight | RMB: Hawkish RRR cut | Article – HSBC VisionGo

RMB: Hawkish RRR cut
Finance  ·    ·  6 mins read

  • China’s key economic data for June came in better than expected, alleviating concerns about a slowdown in its growth outlook
  • As such, the market is likely to view the RRR cut announced earlier, as a hawkish cut
  • The diverging monetary policy between China and the US remains a key driver for USD-RMB, in our view

China’s key economic data for June came in above consensus expectations

Today (15 July), China released some key economic data for June, with retail sales, urban fixed assets investment, and industrial production coming in above consensus expectations (Bloomberg 15 July 2021): 

  • Retail sales rose 12.1% in June from a year earlier (consensus: 10.8%).
  • Urban fixed assets investment climbed 12.6% in the first half of the year over the corresponding period last year (consensus: 12.0%).
  • Industrial output increased 8.3% in June from a year earlier (consensus: 7.9%).

Meanwhile, China’s GDP expanded 7.9% in 2Q21 from a year earlier, broadly in line with expectations (consensus: 7.9%). In our view, this should alleviate concerns about a slowdown in China’s growth outlook that may have arisen after the People’s Bank of China (PBOC) announced on 9 July that it would implement a broad-based reserve requirement ratio (RRR) of 0.5%, effective 15 July 2021. 

China’s onshore market liquidity should be relatively well supported over the near term, while the medium-term trend is likely to moderate , in our view

Earlier today, the PBOC rolled over RMB100bn of the RMB400bn maturing one-year medium liquidity facility (MLF), i.e., medium term policy loans, and left the MLF rate unchanged at 2.95%. The RMB100bn of medium term policy loans is in addition to the RRR cut (releasing RMB1trn of liquidity into the market, based on our economists’ estimate). Hence, liquidity over the near term is relatively well supported, while the medium-term trend is likely to moderate, in our view. 

The PBOC pledges to maintain a stable and prudent monetary policy 

By now, the market is likely to interpret China’s RRR cut as a hawkish cut. On Tuesday, Sun Guofeng, head of the PBOC’s monetary policy department said the central bank’s recent move to cut the RRR was intended to optimise the capital structure of banks and improve financial services to better support the real economy. The central bank reiterated its pledge to keep monetary policy stable and prudent and target support to small and medium enterprises (Reuters, 13 July 2021). 

The RMB’s yield advantage is likely to narrow gradually, driving USD-RMB into year-end, in our view

In our view, the diverging monetary policy between China and the US remains a key driver for USD-RMB, and this should lead to a slightly higher USD-RMB going into year-end. That being said, we believe China is likely to preserve as much policy room as possible so as to encourage structural adjustments in the underlying economy as well as to prepare for any financial instability risk (that could be triggered by external asset bubble concerns, for example). Hence, we expect the RMB’s yield advantage to narrow gradually unless some of these risks materialise.

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