China’s RRReminder that economies remain fragile
China’s decision on Friday to give its economy a 1 trillion yuan ($154 billion) shot in the arm has given investors a reminder that even the largest economies are likely to need the occasional pick-me-up while the coronavirus pandemic lasts.
In one of its trademark Friday night moves, the People’s Bank of China (PBOC) cut its reserve requirement ratio (RRR) – the money banks have to park at the central bank for safety – by 50 basis points (bps).
UBS’s head of emerging market strategy Manik Narain said the move was a fine-tuning rather than a screeching U-turn by the PBOC. Around 400 billion yuan of the 1 trillion the RRR is estimated to be worth is likely to be used to repay existing PBOC ‘Medium-term Lending Facility’ funding, while 700-750 billion of tax payments are also due soon.
At the same time, though, the U.S. Federal Reserve is weighing when to taper its asset purchases and near-zero interest rates it put in place last year and emerging market heavyweights like Brazil, Mexico and Russia are jacking their interest rates up already to address spikes in inflation.
The bond market appears to be responding to the turn in China’s rate cycle by pricing in lower interest rates over the medium term. Even prior to the RRR announcement, hints earlier this week that a cut was coming led China’s 10-year government bond yield to post its biggest weekly decline this year.
The economy is still expected to grow more than 8% this year, however, against the government’s modest growth target of over 6%, suggesting there is no big pressure to step up easing.
“We expect fiscal policy to remain focused on specific sectors most affected by the pandemic like small companies. We also expect macro prudential tightening on the property market to remain in place,” said Gustavo Medeiros, deputy head of research at Ashmore Group.
UBS’s Narain said another take away from of Friday’s move was that other big emerging markets were likely to see it as sign of things to come in their own economies.
“If I am the head of the central bank of Mexico or Brazil and have already been hiking rates, it is also telling me that the (interest rate) hiking cycle is probably going to be shallow.”