TS Lombard with the note:
There were no signals of easing from the quarterly economic work meeting of the Communist Party’s Politburo at the end of July.The statement issued after the meeting reaffirmed that monetary policy would remain “prudent” but ensure ample liquidity to financial markets, while fiscal policy would accelerate already budgeted spending and local government bond issuance. Earlier this year the boom in exports provided major support to industry; but since the country is facing what the statement called “a complex external environment”, the government was tasked with ensuring the timely disbursement of fiscal support to the economy to safeguard the stability and sustainability of growth.
In July the authorities began to roll back extraordinary MLF financing provided during the pandemic, easing the impact of this move via a 50bps RRR cut. With nearly RMB4trn in additional MLF maturities coming due before yearend, we expect more RRR cuts and possibly other measures to inject liquidity in the coming months, although the scope of liquidity support is uncertain. The fact that the PBoC felt it necessary to inject new liquidity to help banks repay MLF maturities tells us that the de-risking of financial markets is still a work in progress. Further, injecting liquidity via RRR cuts reflects an effort to support smaller banks, which typically have lower MLF exposure but greater balance-sheet problems relative to larger banks. While the de-risking of the country’s financial system remains a priority, that goal is still far from being met.
