Research Team at TDS, notes that the PBoC announced today that they will cut banks’ Required Reserve Ratio (RRR) by 0.5ppt effective March 1st, adding more monetary easing to support the slowing economy.
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“This move that will lower the RRR for major banks to 17% does not surprise us in light of our estimation of China’s growth being significantly slower than officially stated (we think 4.5-5.0% instead of 6.9%), which continues to suggest that an easing bias will remain in place for the foreseeable future.
However, the timing is somewhat surprising as the announcement follows the closing remark of the G20 meeting that had stated over the weekend, among the other things, that the group members would consult on measures that can have an impact on their currencies, and monetary easing in China definitely has an impact in the direction of a weaker RMB. As the G20 warning seemed mostly aimed at JPY and CNY, and given expectations that CNY pressure will increase after easing monetary conditions in China, either the Chinese authorities have previously stated their intentions to the G20 partners, but this is unlikely, or they intend to protect the RMB in spite of the cut.
The recent CNY-CNH dynamic, however, makes it more likely that China is simply following its game plan without further coordination with other major economies, and now feels more comfortable on capital outflow risks.
Our forecast for USDCNY remains at 6.95 by year-end and 7.25 in 2017, a gradual grind up that does not entirely support short CNY positions given an annualized carry of 3.4%, our expectations for the CNY to depreciate 9.5% until end-2017, and considering the risks to our forecasts and for interventions. However, the fact that the official CNY fix has been trending up for the past five sessions seems to support a weaker RMB going forward.”
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