FX Spotlight | RMB: Hawkish RRR cut | Article – HSBC VisionGo
- 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.
This document is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Information in this document is general and should not be construed as investment advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on it, consider the appropriateness of the information, having regard to their objectives, financial situation and needs and, if necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered here on a principal or agency basis.
Whether, or in what time frame, an update of this information will be published is not determined in advance.
This report is dated as at 15 July 2021.
All market data included in this report are dated as at close 14 July 2021, unless a different date and/or a specific time of day is indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.