China’s M0 growth on average collapsed from 8.5% in 2013 to 4.4% in 2014, undershooting output growth for the first time since 2001.Despite two policy rate cuts and one required reserve ratio (RRR) cut, China’s liquidity conditions remain uneasy and money growth continues to trend lower. The end of official FX reserve accumulation will require the central bank to do more to keep liquidity conditions from tightening. Much needs to be done by the People’s Bank of China (PBoC) to meaningfully ease liquidity and to avoid tightening. According to Societe Generale – “It will take quite an effort for the PBoC to avoid tightening. In the absence of balance sheet expansion, the central bank may need to cut the RRR by nearly 200bps in 2015. Our forecast is that the PBoC will use a combination of RRR cuts and domestic asset expansion (via new policy tools).”

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