China reaction: Surprising second rate cut in a week
- 25 July 2024 (3 min read)
The busy week for PBoC
On Monday, the PBoC cut the 7-day reverse repo rate by 10bps, aligning with the 3rd Plenum’s emphasis on economic growth and the new policy rate framework announced by PBoC Governor Pan Gongsheng in late June. Shortly after, the market rates Loan Prime Rate (LPR) for 1-year and 5-year were reduced by 10bps, to 3.35% and 3.85%, respectively.
Following Monday's unexpected move, the PBoC surprised the market again this morning with a 20bps cut to the 1-year MLF rate, reducing it to 2.3%. They also injected RMB 200bn via MLF facilities, marking the first positive monthly net injection (RMB 197bn) since February this year. This ad-hoc MLF injection is the second operation of the month, following the usual mid-month operation on July 15, which net withdrew RMB 3bn of liquidity without a rate cut.
It is rare for the PBoC to act so quickly and frequently, especially given their goals of stabilising net interest margins and managing depreciation pressure on the RMB. This unexpected cut ahead of the Federal Reserve's expected easing reflects concerns over disappointing Q2 GDP growth (4.3% year-on-year, 0.5% quarter-on-quarter), weak credit demand in recent months, the reiteration on the pro-growth agenda during the 3rd Plenum and still low rates of Consumer Price Index (CPI) inflation.
After Monday's 7-day reverse repo rate cut, the market anticipated a MLF cut in mid-August, following the usual MLF operation schedule. However, the central bank has acted sooner. Two MLF operations in a month are unusual; the last instance occurred in November 2020 during a credit crisis triggered by the default of a AAA-rated State-Owned Enterprise (SOE), Yongcheng Coal and Electricity.
In the current low-inflation environment, China's real interest rate remains elevated, hindering credit demand and dragging economic growth. This week's actions from the PBoC point monetary policy in an easing direction, which is welcomed by both the market and the economy. It also reveals the pressure to achieve growth targets in the second half of the year and the PBoC's dedication to doing so. Interestingly, these easings have occurred against a backdrop of a firmer yuan against the US dollar, with the yuan firming further after today’s move.
Disclaimer
This market comment should not be regarded as an offer, solicitation, invitation or recommendation to subscribe for any investment service or product and is provided for information purposes only. No financial decisions should be made on the basis of information provided.
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.
Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessarily used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries
©2024 AXA Investment Managers.
Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.