RRR Cut – Policy to Support Stable Recovery
Last Friday, PBOC announced a 50bp RRR cut to support the country’s stable recovery. Here we share our view on the positive near term boost on sentiment amid the moderating 2H growth outlook; while we believe it’s a policy fine-tuning process instead of a shift to a new easing cycle.
The PBOC has announced last Friday to cut RRR (reserve requirement ratio) by 50bp, which will release about 1 trillion yuan of liquidity into the economy, easing funding costs and meeting liquidity demand in the near-term. Together with the RRR cut announcement, the PBOC also released the June credit report, which was better-than-expected and TSF stabilized at 11%. However, credit growth of property and local government financing vehicles remained tight.
On inflation, China’s headline CPI moderated to 1.1% in June amid some COVID resurgence cases, while PPI increased 8.8%, vs. 9% in May. Producer goods PPI rose 11.8% while consumer goods PPI was up a mere 0.3%.
Implication and our views:
Over the second quarter, growth has been slower amid moderation in domestic consumption, slower FAI and inflation concerns. The RRR cut and June credit report have reaffirmed our view on nimble and accommodating policy stance to maintain a healthy economic recovery. The supportive policies are aimed to be neutral, i.e. not over tightening nor loosening, therefore the broad-based RRR cut and the targeted ease of credit growth in specific areas. From inflation perspective, the 0.3% moderate rise in consumer goods suggested limited pass-through of inflation. The government’s efforts to curb commodities price hike seem to have helped.
Our view remains the same that macroeconomic policy will be data-dependent going into the second half of the year. We therefore do not see the recent RRR cut as a start of an easing cycle. While the RRR cut will boost near-term market sentiment, growth moderation will prevail. Thus, bottom-up stock picking on quality names is expected to be crucial in the potential lackluster environment in the second half of the year.