ANALYSIS: PBoC cuts RRR by 50bps; Pantheon Macroeconomics said the cut puts China's financial system in a better position to cope with the coming local government debt issuance

China's central bank cut its RRR by 50bps; the weighted average for all financial institutions now at 8.90%. It said it would maintain prudent monetary policy, and some of the released liquidity will be utilised to repay the maturing MLF for financial institutions, adding that around CNY 1tln of long-term liquidity would be released. Pantheon Macroeconomics says an RRR cut is a "rear-guard action" designed to prevent financial conditions from tightening further, just as the economy needs support through the middle of the year. The consultancy says that it doesn't by itself mean a shift towards broad-based easing, and given that the PBoC will not want to be constantly top-up liquidity, an RRR cut makes sense. The cut is consequential, PM writes, in that it would put the financial system in a better position to cope with the coming local government debt issuance. "PBoC-guided tightening of interbank rates in response to economic recovery later this year is fine, but we've been worried that bond yields would kick up a fuss ahead of that time, due to the balance of supply and demand in the meantime," Pantheon says, "we had expected the PBoC to manage that with its open market operations, as it did at the end of Q2, but an RRR cut would be a more stable way to achieve the same end, as it releases funds indefinitely, making it more likely that any coming rise in yields will progress in an orderly fashion." Pantheon argues that as long as the nexus between monetary and fiscal policy isn't mismanaged, then the material point is what happens to rates.  "We continue to think that the PBoC will guide interbank rates higher, when the vaccines begin to win out against the virus, that should happen before the end of the year," adding "still, for the RMB against the dollar, the main driving force is that the recovery race has shifted in favour of the US, and that should feed through to sustained depreciation pressure for China's currency by the end of the year."

09 Jul 2021 - 10:25- Fixed IncomeResearch Sheet- Source: Newsquawk