Via the excellent Damien Boey at Credit Suisse:
On Friday evening, the PBoC announced another 50bps cut to the reserve requirement ratio (RRR) for major banks. The announcement came just before the release of weaker-than-expected Chinese trade data, which revealed that year-ended growth in USD-denominated exports fell to -1% in August from 3.3%. Interestingly, the CNY and CNH appreciated in response to the PBoC announcement.
Firstly, on the weakness in Chinese trade data, trade wars are clearly having an effect here. Over the past year, we note that China has lost share in the market for US imports. Europe has gained. Also, it is worth highlighting that activity growth continues to undershoot financial conditions, as proxied by our proprietary financial conditions index (FCI). Our FCI does not capture all of the incremental shifts from trade policy changes, because it focuses on price and quantity measures of the easiness of domestic liquidity conditions, as well as the strength of US demand all other things being equal. And for what it is worth, the FCI has been pointing to better growth outcomes for some time because of easier liquidity conditions and robust expansion in US retail sales.
