July 8th, 2021

China: U-turn of monetary policy ahead?

In Short

Yesterday, China’s State Council strongly surprised by mentioning an RRR cut. In addition, a former PBoC official suggested a rate cut in H2. Markets wonder whether these remarks are already signals for a U-turn in monetary policy and if so, what reasons might have played a role in the background?

Highlights:

The latest State Council meeting in China strongly surprised markets by mentioning a Reserve Requirement Rate (RRR) cut in the context of supporting SME financing, given the recent PPI-CPI squeeze on profits which especially hurts SMEs.
In addition, a former PBoC official Mr. Sheng Songcheng (former head of the PBoC’s Financial Survey and Statistics Department) was quoted by Bloomberg) that cutting rates could be reasonable in H2.
The news could also hint at the next week’s release of Q2 GDP growth to be weaker than expected.
Together, this led to strong market speculation about a U-turn of China’s monetary policy. Given the news, we expect a targeted RRR cut for SMEs soon, but no broad-based easing of monetary policy. However, the rather rapid decease in the Total Social Financing (TSF) growth rate is likely to soften, going forward. We expect the PBoC to hold its medium-term lending facility (MLF) rate constant this year.