China: Another RRR cut to follow in 1Q22

RRR to drop by 50 bps on 15 December.
Samuel Tse07 Dec 2021
    Photo credit: Unsplash Photo

    The PBOC cut the Required Reserve Ratio (RRR) cut by 50 bps yesterday in response to slower economic growth. From 15 December onwards, the RRR for large banks and small banks will fall to 11.5% and 5.0% respectively, thereby releasing RMB1.2trn of liquidity. The cut is meant to offset the maturing MLF on the same day, which amounted to RMB0.95trn. That said, the net injection of the latest policy is expected to reach at least RMB0.25trn

    China has been slowing through the second half of the year. GDP growth fell from 7.9% YoY in 2Q to 4.9% in 3Q. Industrial production plunged to 3.5% in October from 35.1% in January-February. Due to soaring PPI amid power shortage, downstream industries suffered from profit squeeze. For instance, industrial profit of automobile companies dropped by 2.9% YoY in October while that of textile sector advanced by 1.9% only, which is pale in comparison to the triple-digit growth of the coal mining companies (201.2%). Meanwhile, the weak consumer sentiment (retail sales and core CPI grew by 4.9% and 1.3% in October only) added profit pressure to these industries. Liquidity injection into these affected sectors is needed. 

    We expect another 50bps of RRR cut to be announced in 1Q22 due to ongoing bond defaults of property sector. While stressed developers are struggling with repayments, some property developers defaulted despite not breaching “the three red lines”. Credit ratings of various developers were downgraded, as some companies are reported to sell their subsidiaries for debt repayment after being reported for potential default. The China HY bond yield rebounded from 19.3% in late-November to 22.1% as of yesterday.  Yet, we are not convinced that the authority will flood the market with liquidity by cutting the Loan Prime Rate as this would derail the new “Common Propensity” policy design - which aims at removing moral hazard. As such, we only project mild retreat on government bond yield and the exchange rate.  The end-2022 USD/CNY forecast is maintained at 6.65, down from the current level of 6.38.

    Samuel Tse 謝家曦

    Economist - China & Hong Kong 經濟學家 - 中國及香港
    [email protected]

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