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FX Viewpoint Flash : RMB: Kicking off the year with a large RRR cut

26 Jan 2024

Key takeaways

  • China announced a 50bp RRR cut and more financial support

    for developers by easing loan uses

  • Proactive policies can have a more positive impact on the

    RMB from the risk sentiment channel…

  • …which may help overcome the pressure from yield

    disadvantages, in our view

The PBoC announced a 50p RRR reduction, along with targeted rate cuts to support the agricultural sector and small firms

At the State Council Information Office’s (SCIO) press conference on 24 January, the People’s Bank of China (PBoC) Governor, Pan Gongsheng, announced that:

  • The PBoC would lower the reserve requirement ratio (RRR) for banks by 50bp on 5 February to provide RMB1trn in long-term liquidity to the market;
  • Relending and rediscount rates for small-scale and agricultural-related lending would be lowered by 25bp (from 2% to 1.75%), effective on 25 January; and
  • Such measures will help to guide the loan prime rates (LPR) lower.

This upcoming RRR cut is notable for its size, as the Chinese central bank has reduced the ratio by only 25bp over the past two years, with the last reduction in September 2023.

Chinese developers will be given more financial support via easing commercial property loan conditions

A few hours after the SCIO’s press conference, the PBoC and the National Financial Regulatory Administration (NFRA) jointly announced that banks will be able to provide commercial property loans to eligible Chinese developers to allow them to repay debts that are not necessarily related to projects pledged as collateral. Such easing will be allowed until the end of the year.

In the near term, the RMB is likely to be supported by positive risk sentiment against the backdrop of more proactive policies

For the RMB, we think proactive policies can bring a more positive impact from the risk sentiment channel. Bearish risk sentiment and resultant equity outflows have been a heavy drag on the RMB. There were about USD7bn worth of net Stock Connect outflows in the first three weeks of January 2024. Bloomberg reported that, on 23 January, the potential stock market rescue plan reversed the trend and brought USD1.2bn of net inflows in one day (Bloomberg, 24 January 2024). The proactive tone from the PBoC may further add to that momentum, supporting the RMB over the near term.

The PBoC’s FX policy and seasonal demand could also be positive for the RMB

In addition, the PBoC’s governor said the central bank will prevent excessive FX rate adjustment and formation of any unilateral consensus expectations and their self-reinforcement. As such, the PBoC is likely to stick to its FX policy and could even come up with new ways to stabilise the RMB. Finally, a seasonal pickup in Chinese exporters’ FX conversion ahead of the Lunar New Year period may add to RMB appreciation pressure.

All this could outweigh the pressure from the RMB’s yield disadvantage

In summary, a combination of positive risk sentiment, the PBoC’s FX stance and seasonal support may help overcome the pressure from the RMB’s yield disadvantage over the near term, in our view.

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