RRR Cut Widely Expected This Weekend

Chinese investors expect an RRR cut is coming and that it will boost the stock market. Unlike the April 2018 RRR cut that didn't boost A-shares and immediately ignited a broad U.S. dollar rally that spread to CNY in June.

iFeng: 券商盘前紧急辟谣！央行即将抉择，到底降不降准？

Thus far, the only loud noise is coming from the rumor mills:

The call for an RRR cut in April has been around for a long time. But so far, only the stairs are echoing, no one is coming down.

Analysts see a need for an RRR cut soon though:

Faced with the apparent gap in funding and supply in mid-April, the central bank has to make a choice, probably in the coming week. If the drop is not down, the answer will be revealed soon!

However, analysts said that the current stage of RRR cuts may not determine the direction of A shares. The key to the so-called "April Decision" is still fundamental. After the valuation is repaired, the further rise of the stock market requires fundamental support.

The article goes through various broker reports. If you believe expectations are right when the odds become overwhelming, then it looks like a clear green light for an RRR cut:

The report mentioned, "We expect the central bank to put funds to fill the gap before the expiration of the M$366.5 billion MLF on April 17," and "the central bank will continue to reduce the deposit reserve ratio 1-2 times in the credit expansion process in 2019." "We believe that it is more likely that in addition to the general RRR cut, the deposits formed by small and micro enterprise loans will be targeted."

RRR cut expectations keep rising:

In fact, analysts basically don't do that, especially when the central bank has just ridiculed the "downgrade rumors."

However, the rumors of the RRR cuts have been one after another, and even the central bank’s “dispelling” can’t stand it. What does this mean?

This shows that the market expects a strong RRR cut.

The expectations are so strong that many believe the cut will be announced this weekend:

Analysts believe that the central bank does need to make a choice of RRR. This time point may be "within five trading days."

Let us first look at what the central bank has made before.

The central bank has stamped out rumors that cuts were coming/made, but it refuted "fake news," it did not say anything about upcoming policy:

The central bank’s emergency rumors late at night showed that monetary policy has attracted much attention from the market, especially now.

On April 2, the Central Bank’s Weibo’s “Chengfang Street Review: To Awaken the Detectives in the Financial Market” mentioned:

"On the evening of March 29 (Friday), a rumor of the "Return of the April 1st" issued by a counterfeit Xinhua News Agency was circulated on the WeChat group. Later, the General Office of the People's Bank of China immediately clarified that The news was untrue, and the rumors were smothered in time to prevent the rumors from continuing to spread widely. The central bank has also officially sent a letter to the public security organs on this matter, so please investigate and punish the publication of false information according to law."

However, the central bank’s rumor that “the RRR has been lowered since April 1st” means that it will not be lowered in the future.

The central bank did not say that "it will not be lowered in the future!"

So, may it be lowered in April?

At least for now, the market's expectations for RRR cuts remain strong. Because there is a huge gap in liquidity supply and demand in mid-April:

Odds of an RRR cut are large because the central bank itself said there is room for more cuts. (Related from Reuters Analysts expect China to cut bank reserve ratios soon and Bloomberg China Has Less Room for Reserve Ratio Cuts, PBOC's Yi Says
)

As to the liquidity gap:

The first is fiscal tax collection. April is a traditional tax month. From the data of the past five years, the general tax revenue in April is about 1.35 trillion yuan. Next week (around April 18) will be the peak period for the collection and payment of taxes and fees this month.

Second, the MLF expires. In April, there will be 367.5 billion yuan of medium-term loan facilities (MLF) will expire, the maturity date is April 17, coincides with the peak of the tax period.

Third, there are also many government bond issuances. In the middle of the month, when the local government bonds are issued the most, the government bond issuance payment will also increase the fiscal bank and consume liquidity.

In the case that foreign exchange reserves are not expected, this gap can only be filled by the central bank. Therefore, before the peak of the April tax season (around April 18) and the expiration of the MLF (April 17), the central bank has no suspense to restart the liquidity.

The question is, what way will the central bank adopt liquidity?

Among the many means by which the central bank puts liquidity, the RRR cut is still an option and the most demanding option. Because the liquidity of the RRR release is “large” and “excellent”, it can not only stabilize liquidity, but also help to lower market interest rates. If it is coordinated with policy guidance and incentives, such as targeted RRR reduction, it will also help ease SMEs. Financing is difficult to finance.

Of course, if the RRR is not lowered, the central bank may also adopt a mix of reverse repurchase and various “powder” practices. For example, reverse repurchase plus "Spicy Powder" (MLF), reverse repurchase plus "Special Spicy Powder" (TMLF), or reverse repurchase plus "Spicy Powder" plus "Special Spicy Powder".

Compared with the RRR cut, the latter schemes can also play a role in stabilizing liquidity, but it may cause “expected difference” to the market and prompt the market to adjust monetary policy expectations. This is the key.

In short, if the drop is not down, the answer may be announced in the coming week. The next week is an important period of monetary policy observation.

April and May are seasonal turning points for A-shares in recent years:

Looking back from 2011 to the present, A-shares tend to choose direction in April. In 2011, 2014, 2016, 2017, and April 2018, the stock market turned to decline. After the stock market rose in April 2012, it fell in May. In April 2013 and 2015, the stock market rose further.

Global investors may want to pay attention to A-shares if Haitong Securities is correct in believing the April turn is mainly caused by fundamental factors, because the macro data sends a clearer signal about the economy:

Haitong Securities said in the April 4th April Decision:

“The fundamental data before April is not clear. The market is often affected by policies or events. At the beginning of the year, liquidity is usually abundant and investors have high risk appetite. Therefore, spring incitement often occurs.

After April, the macro data of March was gradually announced. The annual report and the quarterly report of the micro-enterprise also began to be disclosed. After the spring, the fundamentals gradually became clear. After the important meeting was over, the macro-policy situation was also clearer. Therefore, investors can be in April. Make a clearer judgment on the market. ”

For the A-share market, which currently relies on “valuation repair”, when the 3,200 points are faltering, the choice of the central bank is obviously very important. If it is a RRR cut, the release of low-cost liquidity will boost the market's risk appetite in the short term.

However, some analysts said that the current stage of RRR cuts may not determine the direction of A shares. The key to the so-called "April Decision" is still fundamental. After the valuation is repaired, the further rise of A shares requires fundamental support.

“The Shanghai Composite Index has been the first stage of the bull market since 2440. The increase is due to the valuation restoration. The risk premium and the stock price index show that the current stock market risk-to-income ratio is not obvious. The second stage of the market entering the bull market needs to confirm the basics. At the end of the day, April is a clear period, and it is inferred from the bottoming time of leading indicators that it takes time to see the simultaneous indicators." Haitong Securities said.

In other words, the current biggest impact on the A-share trend may not be liquidity, but fundamentals.

Therefore, March economic and financial data is a point that the stock market should pay more attention to.