China’s PBOC rate cut was no surprise

May 11, 2015 10:36 AM (UTC+8)

 

The 25 bps benchmark rate cut by the People’s Bank of China that popped up Sunday on the central bank’s website was no shocker.

Further easing by the PBOC had been expected in the wake of recent Chinese economic and stock market performance. Asia Unhedged believes that further reverse repo rate cuts are in the offing and this should lead to another 100 bps in 2Q.

Sunday’s central bank move supports investor notions that below-average economic performance will be tolerated by government regulators only up to the point where it doesn’t seriously undermine employment. Asia Unhedged believes that point has been reached.

Bad April export numbers on top of bad import numbers are fanning government fears of an economic slowdown. A lower than expected April CPI of 1.5% y-o-y, for the time being, also lays to rest concerns that more monetary easing will stoke inflation.

China’s government is also keen on keeping the bull market in Chinese stocks going.  Last week’s stumble in Shanghai can be largely blamed on liquidity constraints. A flood of 125 IPOs, margin restrictions and a strong yuan on the macro level have prompted investors to hang back.

But a bit of sour medicine every now and then is a good thing. Margin restrictions are necessary; IPOs are a definite longer-term good. Asia Unhedged believes that Chinese stocks’ fundamentals remain intact and sees no problem with the PBOC upping liquidity.

Other folks are taking the same line. “This is unlikely to mark the end of policy support …We expect a further 150 basis point reduction in the RRR before the end of 2015, plus continued direct support for lending in the form of re-lending operations…,”  Mark Williams of Capital Economics told the Wall Street Journal’s China RealTime Report on Monday. “There is a tendency always to see China as teetering on the edge of economic collapse, but given the range of tools at policymakers’ disposal and their willingness to use them, conditions should soon stabilize. That would keep GDP growth on the official figures at around 7%. Despite it being a response to economic weakness, today’s move is also likely to give another boost to equity markets,” Williams said.

If there’s an issue, Asia Unhedged believes it’s with the basic lack of coordination in  government/PBOC monetary and exchange rate policy. The PBOC cuts rates but supports the strong yuan. It relies on capital account curbs to sustain currency strength. Beijing wants the yuan to be included in the IMF’s SDR mix and is most reluctant to permit significant depreciation. But China’s capital account looks a bit like Swiss cheese. Many of the holes were created through things like the Hong Kong-Shanghai Stock Connect. It’s time to give monetary policy the upper hand, remove capital account restrictions in orderly but rapid fashion and let the currency fend for itself.

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