If you were concerned that Tencent (TCEHY) and Alibaba (BABA) were shouldering a disproportionate share of the burden when it comes to the MSCI China, you can rest easy because apparently, all it takes is one targeted RRR cut to make everyone completely forget about the ongoing effort to rein in leverage in China’s financial system.
Over the weekend, the PBoC announced an RRR cut for some banks contingent upon their lending to small businesses. It’s pretty straightforward as these things go: if you lend more than 1.5% of your new loans in 2017 or 1.5% of your total loans at end- 2017 to these small business, you get a 50bp cut and if you lend more than 10% of your new loans in 2017 or 10% of your total loans at end- 2017 to small businesses, you get an additional 100bp cut. I know! Sweet ass, right?!
No, but seriously, this is just an effort to offset the tightening engendered by macro prudential measures designed to guard against systemic risks and to the extent we can differentiate between counter measures and overt easing, this is probably more akin to the former. Think about the timing. Here’s SocGen:
On 1 January 2018 – the time of the RRR cuts, the financial system and the economy will be facing several forces of tightening.
- To financial institutions, the scheduled RRR cuts will serve to offset a potential liquidity shock resulted from further financial deleveraging measures. The PBoC is already set to include banks’ interbank borrowing in the macro-prudential assessment (MPA) starting 2018, so as to add pressure on banks to scale back their financial leverage. There may be more financial regulations in the coming months. A big liquidity injection will probably be needed to allow the PBoC to keep interbank interest rates within their current ranges, which is the technical definition of no change in the monetary policy stance.
- The real economy will need some credit assistance to weather the anti-pollution campaign, which will likely cause severe disruptions to industrial production and construction activities in the next six months. While large enterprises may have sufficient cash flows to weather the supply shock, small companies are likely to need financial assistance. The conditionality attached to the cuts and the three month gap between the announcement and implementation should increase banks’ incentive to lend more support to those in need
