Over the weekend we observed that the timing of the latest round of easing by the PBoC (the third rate cut in six months and the fourth time this year Beijing has loosened monetary policy) felt rather familiar. Last week, reports out of China indicated that brokers were moving to tighten margin requirements amid the country’s leverage-fueled equity rally. The following session saw Chinese equities plunge 4% on their way to an abysmal week. Last month, a similar series of events played out on the Friday before the PBoC announced its second RRR cut of 2015, prompting us to suggest that Beijing may be taking its cues not from the economy, but primarily from the stock market.
Ultimately we came to the same conclusion we did after April’s RRR cut: last week’s dip will be bought and the centrally-planned bubble now has the green light to inflate to still greater and more unsustainable levels. Sure enough, Chinese stocks soared 3% overnight and less than 48 hours after the PBoC’s latest effort, the message from the sellside is clear: MOAR.
From Deutsche Bank, who thinks there are two more rate cuts and one more RRR cut in the cards this year:
The PBoC cut 1 year benchmark deposit and lending rates by 25bp today. The PBoC also lifted the ceiling of deposit rate to 1.5x of benchmark rate from 1.3x in the past. This rate cut is in line with our expectation. We revise our interest rate call and expect two more cuts in 2015 -- the next cut in June and another cut in Q3. We continue to expect one more RRR cut in Q3. Our detailed comments are:
We believe there is a stronger sense of urgency in the policy circle. Export growth was strong in January and February but turned negative in March and April. The official PMI remains at 50.1 while the HSBC PMI slowed to 12- month-low at 48.9 in May. Data release in the coming week will shed more light on activity indicators such as IP and FAI in April. Policy makers likely realized that the risks of missing the 7% growth target were rising.
How much room is there for PBoC to cut benchmark interest rate? We now expect two more interest rate cuts in the rest of 2015. We do not expect more because we believe CPI inflation may start rising in H2, and real interest rate may turn negative. The key issue is whether CPI inflation will rise in the rest of 2015. We believe it will in H2, as commodity prices started to rebound in recent months, and pork price in China faces upside risks given its current abnormally low level.
And here’s Goldman:
Real lending rate is still high: Despite the recent cut to the RRR ratio and adequate liquidity in the interbank market, the effective lending rate at the retail end may still possibly be high on a real basis: April CPI and PPI both came in lower than market expectations, and the nominal effective lending rate was at a still-high 6.78% in 1Q. Policymakers also acknowledged this concern by highlighting the need to "more efficiently channel monetary policy to support the real economy" at the politburo meeting held recently. Policymakers may therefore have seen the need to further lower benchmark interest rate to help lower corporates' borrowing cost. The signaling effect of this rate cut might be useful now in guiding longer term rate down afterwards.
We continue to expect more policy easing measures to be rolled out. Given policymakers' tendencies to use benchmark rate cuts and RRR cuts alternately, we believe the next major monetary policy move could be a RRR cut, possibly in 3Q, though we would not rule out a cut before the end of 2Q. The government is stepping up other loosening policies, such as increasing public expenditure, which was explicitly stated in the politburo meeting announcement on Apr 30. These measures will likely provide some support for short-term growth. We believe 2Q is likely to see a sequential rebound in activity growth as a result of this combination of policy loosening measures, the gradual dissipation of effects from the anti-corruption campaign (which has generally been concentrated in the traditional gift-giving, dining and wining season around the Lunar New Year) and our expectations for external demand recovery, particularly in the US.
And the broken record keeps spinning as Morgan Stanley sees one more rate cut and multiple RRR cuts in 2015:
We expect further easing with one more 25bp symmetric interest rate cut and more RRR cuts. These measures are likely to help stabilize the macro environment and create more room for reforms. In view of persistent capital outflow and weak M2 growth, the PBOC will likely increase liquidity injection to stabilize overall financial conditions. In addition, with the deposit rate ceiling lifted to 1.5 times the benchmark interest rate, we think the next move will be to fully liberalize deposit interest rates when the PBOC cut interest rates again.
Finally, there’s Barclays, who points to still elevated real interest rates and predicts four more (assuming rate cuts are in 25bps increments) rounds of easing by year end:
Looking ahead, we expect the PBoC to continue to deliver RRR and interest rate cuts, to lower real interest rates and manage liquidity. We now look for further benchmark rate cuts in total of at least 50bp by Q3, accompanied by a complete removal of the deposit rate ceiling. We maintain our call for two more RRR cuts by Q3, with risks for more easing if economic growth fails to stabilize by mid-year.
We think the persistent downside growth risks and the still-elevated lending rates point to the need for accelerated pace of monetary easing. The latest economic data, including April trade growth and flash PMI, continued to surprise to the downside. Moreover, despite recent policy moves by the PBoC, interest rates remain high for the economy (Figure 2). The real lending rates and bond yields still trend upward given subdued inflation (1.5% in April, Figure 5-6). Note that as the bank’s lending rate is fully liberalized, the pass-through of the lending rate cut is limited, which points to the need for further monetary easing to guide rates lower. The PBoC Q1 Monetary Policy Report shows that the average lending rate was 6.78% in March, 15bp lower than that in December. Meanwhile, it is worth noting that the PBoC has also been guiding the interbank rate lower since March. The 7d repo rate fell sharply to below 2.5% following the 100bp RRR cut on 19 April (Figure 3).
For those looking to get the latest on the PBoC's policy moves, you may find yourself hopelessly behind the curve if you wait for an e-mail from your favorite sellside desk or even if you stay glued to your terminal because as it turns out, WeChat had the central bank's statement "word for word" hours ahead of the announcement, suggesting it isn't just Janet Yellen that leaks data.
From Reuters:
More than two hours before China cut its interest rates on Sunday afternoon, the financially sensitive information was making its rounds among users of China's popular social messaging app WeChat.
The WeChat message, seen by Reuters at 2:41 p.m., was bang on the money; it said China would cut interest rates by 25 basis points and raise the ceiling for deposit rates to 1.5 times the benchmark.
The information was attributed to the People's Bank of China (PBOC), and the WeChat message, which redirected readers to an anonymous web page, did not carry the central bank logo or any official government stamp.
When the real announcement was released shortly after 5 p.m. local time, it matched word for word.
In China, information often leaks ahead of official announcements, and as the world's second-biggest economy, that can swing financial markets at home and abroad.
Song Qinghui, a prominent financial news commentator in China, said he had seen the leak "exploding" in WeChat circles as early as Sunday morning.
"There are so many such leaks in China. Although offenders can be sentenced to the stiffest possible punishment, no one investigates the leaks," Song said.
* * *
In sum, it looks like we can expect at least three more rounds of easing out of China by the end of the year but the more interesting question revolves around the pile of high-yielding debt (which totals somewhere in the neighborhood of 35% of GDP) weighing down the country's local governments. As we've discussed at length, Beijing is pushing a new refi program that will allow local governments to swap that debt for lower-yielding bonds but demand for the new issues has proven tepid suggesting the PBoC will be forced to intervene by either allowing purchasing banks to post the bonds as collateral for cheap funding or by buying the local government bonds directly (the former option amounts to Chinese LTROs and the latter is simply QE). For its part, the PBoC is still sticking to the "there is no such thing as Chinese QE" line — we'll see how well that holds if incremental policy rate cuts begin to prove just as ineffective at propping up the stock market as they have at supporting the economy.
