RRR Cut Talk Boosts Optimism, But For How Long?

China's SMEs Cannot Obtain Low Cost Credit, Can Li Keqiang Finally Save Them? covered the recent State Council meeting chaired by Li Keqiang and focuses on SME financing. As part of the plan, credit costs will be eased through reserve requirement ratio (RRR) reductions.

A newer article discusses the coming RRR cut and who will benefit. A big question is whether it will be a broad RRR cut as in April or a focused cut as announced in September and implemented in January. That earlier cut lowered the RRR for banks that crossed a minimum threshold for SME lending.

iFeng: 国务院会议透露重要信号！定向降准要来了股市要沾光？

Which areas will benefit from targeted reduction?

1 SME

As the upcoming third directional RRR cut and the directional RRR cut in April all clearly point to the need to ease the financing difficulties and financing of small and micro enterprises, the most direct beneficiaries of the policy will undoubtedly be Xiaowei. enterprise.

Another related news is that today, the State Council issued a report that State Council Deputy Prime Minister Liu He served as the head of the State Council Leading Group to Promote the Development of SMEs. In December 2009, in order to strengthen organizational leadership and policy coordination for the promotion of SME development, the State Council decided to establish a leading group of the State Council to promote the development of SMEs. The office of the Leading Group is located in the Ministry of Industry and Information Technology and undertakes the daily work of the leading group. It is responsible for researching and proposing policy proposals for promoting the development of SMEs, and supervising the implementation of the agreed items of the leading group.

As Liu He is also the director of the State Council Financial Stability Development Committee (JSC), it is widely expected in the industry that more financial policies will be introduced in the future to promote the development of SMEs.

2 stock market

Although the executive meeting of the State Council stated that the targeted reduction was aimed at alleviating the difficulties of financing microfinance and financing, it is undoubtedly a good news for the stock market that the release of the news of the release of liquidity at the time when the stock market is more sensitive.

In fact, the performance of the A-shares has eased somewhat since Yi Gang’s “prompt” appeases the stock market. At the close of the trading day, the Shanghai Composite Index reported at 2,915.73 points, a slight increase of 0.27% from the previous day; Shenzhen Component Index reported at 9501.34 points, a slight increase of 0.92% from the previous day.

At the same time, global stock markets collectively rebounded today. Before the press release, European stocks extended their gains, and the UK’s FTSE 100 index led the gains by more than 1%, the largest increase in more than a month. US stock futures rose collectively, with Dow Jones futures up nearly 100 points and S&P 500 futures up 0.2%.

However, many interviewees also believe that this year's A-share market is more uncertain and it is difficult to have a clear and clear opportunity in the short-term. Therefore, it is still advisable to be cautious.

3 Bank

If the third orientation is still a replacement MLF, it is also good for banks. According to Wang Jian, the chief banking analyst of Guosen Securities, it is “lower borrowing and paying less interest, which will help improve bank profits.”

Wang Jian once stated that according to estimates, without considering the RRR cut, the base currency for the whole year of 2018 will need to increase by 3.2 trillion yuan, which is an absolute high in recent years, and 3.2 trillion yuan will be put in such a large amount of base currency, accounting for foreign exchange. Where funds, fiscal expenditures, and other channels do not contribute substantially, they can only be handed over to the central bank’s monetary policy instruments, including reverse repurchases and MLFs. If the foreign exchange funds, fiscal expenditures, and other aggregates only contribute 700 billion yuan in the base currency, then the central bank's monetary policy instruments will need to put 2.5 trillion yuan. This also means that banks should increase their liabilities to the central bank accordingly, pay interest for this purpose, and also need corresponding liquidity management to meet liquidity supervision indicators. It cannot be overlooked that this is a monetary policy operation cost for the central bank and a real money interest expense for the bank.

"Accordingly, the RRR cut is a more realistic option to reduce the costs of all parties. In order to avoid the release of the wrong signal of monetary easing, the central bank should adopt directional RRR cut," said Wang Jian.

Will an RRR cut help the market? The recent history is not encouraging. The September announcement had little effect on the market. The RRR cut took effect on January 25. The U.S. stock market peaked on January 26, China saw its intraday high on January 29. The closing high was on January 24. Maybe a coincidence.

China announced a more significant RRR cut on April 17. The impact on the stock market wasn't significant, but the U.S. Dollar Index would rally more than 6 percent in the next six weeks. Emerging market currencies and local currency EM bond funds still haven't reversed.

The last time China began cutting the RRR was from February 4, 2015 through February 29, 2016. Here's how the Shanghai Composite and U.S. Dollar Index performed. The dollar rallied 5 percent following the first cut. It cut again on April 19 and the dollar slid 5 percent. China cut the RRR in August (after the depreciation that surprised the world) and the dollar immediately rebounded.

The Chinese stock market was in the midst of a bubble that wouldn't peak until June, but as happened this year, the August RRR cut stabilized the market for a spell before it moved on to new lows. The final, last RRR cut came at the post-2015 low for the Shanghai Composite. If this is the last rate cut, it would be good news for the economy and bullish for stocks. If the PBoC isn't done lowering the RRR, it will not be long-term bullish.

As for SMEs and banks, it will depend on confidence and willingness to borrow. The RRR doesn't do much if banks don't want to lend. If its a targeted cut aimed at SMEs, the impact could be even more limited.