In the wake of last week’s disappointing GDP figures confirming the slowdown in the Chinese economy, the People’s Bank of China yesterday announced new stimulus measures in order to bolster growth in the quarters ahead. PBoC announced a 100bp cut to the Reserve Requirement Ratio for the whole banking sector to come into effect today. This essentially allows the banks to lend more as they need to hold less reserves.
The cut is the biggest since 2008 and appears to be aimed at the rural sector with banks that meet requirements of prudent operation and a certain ratio of loans to the agricultural sector or SME’s receiving an additional 50bp cut to their RRR. The move will release in excess of $1 Trillion Yuan (~248 billion AUD) of liquidity into the market.
In the short term the announcement should provide a boost to sentiment and economic activity. The increase in credit however is likely to bring into question the stability of growth as we saw at the end of the 25 year credit binge in developed economies. There is also a risk that the additional liquidity will further inflate the Chinese stock market which is already up more than 100% in less than a year (graph left).
This week’s local focus will be on the first quarter inflation figures for Australia which will be released by the RBA on Wednesday. The market is currently expecting the headline index to rise 0.1% which would see the annual rate to fall to 1.3%. The core reading is expected to remain in the normal range around 0.5% which would see the annual rate remain stable in the lower end of the RBA’s 2-3% target band.