TS Lombard with the note. This is classic Chinese delusion in action. That the slowdown can be managed and won’t panic the CCP in due course…
PBOC CUTS RRR, GOES TO NEUTRAL
China inflation data have signalled stress in the real economy and given the PBoC room to move firmly into neutral to counteract slowing activity. PPI dropped to 8.8% yoy in June, down from 9% in May. CPI fell, too, nudging down to 1.1% yoy vs 1.3% yoy in May,thereby exacerbating a margin squeeze that is hitting private-sector manufacturing. Since May we have argued that the demand destruction impact of higher commodity prices would push the PBoC to adopt a neutral policy stance. Today the PBoC announced a cut in the reserve requirement rate for banks by 50bps (effective July 15) freeing up roughly RMB 1 trillion in long term liquidity and ending seven months of tightening. We characterize the move as a “hedged” or offset, because much of the liquidity released will be absorbed by maturing MLF and surging bond supply. For markets, the shift is an important signal and removes some of the downside risk around massive Q3/21 bond issuance. However, caution is still needed: the PBoC is managing rates, focussed on de-risking, and is not conducting broad easing; this means that yields are likely range bound. We do not change our growth outlook and expect China to reach pre-covid trend of 5.5% yoy in Q4/21.
