Not surprising in the context of recent moves by PBoC and perceived need for some type of economic jumpstart, but surprising on timing and potential scope.
Here are key factors -
Why did China cut RRR?
- If you can’t beat ‘em, join ‘em as central bank mania continues. China will not be left out and I would argue is a founding member of the currency and policy manipulation front. Not to be outdone China needed to act.
- We have argued despite months and month of RRR talk PBOC would have to cut RRR before the Lunar New Year holiday, partly to ease domestic liquidity conditions, which have tightened in recent weeks due to the strong USD and actions by other central banks around the world
- But it doesn’t bode well for growth in 2015 and probably something they wanted to do in 3Q ’14 but couldn’t because of weak monetary transmission
- Growth downgrades are coming from the street if not the government (7.2% consensus is too high); fiscal downgrades of growth were not expected
- Expect another 50bps of RRR in 2Q
The impact of the cut is not clear but releases about 600-700RMB of liquidity into banking sector – this is sizable but not a game changer for China, again if anything this tells us China may be worse than expected. Does this mean I’m out there running for cover? No, and I’m not running from China consumption plays either. China consumption stories are alive and well and finally seeing some movement in the long term prospects for some of my core ways to play consumption: China Mobile (CHL, quote), Tencent (TCEHY, quote), Baidu (BIDU, quote), and Alibaba (BABA, quote).