China’s PBOC Seen Cutting RRR This Weekend To Stimulate
$GS, $HSBC
China could cut banks’ RRR (reserve-requirement ratios) this weekend to spur economic growth and boost cash supply to counter a rise in municipal bond sales.
The People’s Bank of China (PBOC) may lower the amount lenders must set aside as reserves by as much as 100 bpts this weekend to 17.5%, according to China Merchants Bank Co. analyst Liu Dongliang. That would be the 3rd reduction this year.
HSBC Holdings Plc (NYSE:HSBC) predicts a 50 bspt cut in the “coming weeks,” while Goldman Sachs Group Inc. (NYSE:GS) said 1 may occur this month at the earliest.
Exports fell for a 3rd month running in May and inflation slowed to the least since January, data showed this past week, indicating there is room for more monetary easing to drive an economy that grew the least in 6 years last Quarter. A 4X rise in municipal bond sales this year, as the government encourages local authorities to switch high-interest debt into lower-cost notes.
“There are no signs of the economy stabilizing yet,” said China Merchant’s Liu in an interview Wednesday. “As muni bond issuance becomes a regular occurrence, the central bank will think of ways to guide longer rates downward and lower funding costs.”
The PBOC may seek to cut reserve ratios as 24 IPOs lock up an estimated CNY 6.7-T ($1.1-T) of funds next week. As of Thursday, local governments had announced CNY 161.2-B of Muni sales for next week, while some CNY 670-B from the PBOC’s Medium-Term Lending Facility comes due. Firms will also be withdrawing cash to make tax payments.
The 7-day repurchase rate climbed for a 4th day Friday, rising 2 bpts to a 1-wk high of 2.07%, according to a weighted average from the National Interbank Funding Center.
The benchmark 10-yr sovereign bond yield of 3.62% is little changed YTD, even as the central bank cut the lending rate and RRR 2X each. Bond investors are preparing for an increase in supply as the Ministry of Finance granted another CNY 1-T quota for a local-government debt swap this week, boosting the program to CNY 2-T. The frame of these new Munis have ranged from 3 to 10 yrs.
A reduction in the RRR could happen soon, it is the most effective way of pushing down long-term rates, Goldman Sachs. economists wrote in a research note.
Have a terrific weekend.
HeffX-LTN
Paul Ebeling
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