China’s biggest liquidity injection in three years not a game changer for BCA while HSBC fund sees muted impact

  • RRR cut is not a game changer for the economy as credit growth and investment, key drivers of business cycle, have yet to rebound decisively: BCA Research
  • Channel checks suggest Chinese banks have no aim to change their full-year credit plans at the end of 2021, Morgan Stanley says

China is set to inject the biggest amount of liquidity into the system in more than three years from a cut in banks’ reserve ratio. Stock investors may need to tread with caution as past market reactions have been mixed at best while the economy struggles.

The People’s Bank of China this week announced a 50-basis point cut reserve requirement ratio effective from December 15, the second this year after a July 9 move. The decision will free up 1.2 trillion yuan (US$188 billion), the most since a full percentage point reduction in October 2018 unleashed the same amount of cash.

The Hang Seng Index rose by 2.7 per cent from near a 15-month low, while the benchmark in Shanghai gained 0.2 per cent. Alibaba Group Holding, the owner of this newspaper, surged by a record 12 per cent after losing almost half of its market value over the past six months.

Not every RRR cut has generated the same level of optimism. China has now lowered the reserve ratio 11 times since April 2018, adding a cumulative 8.2 trillion yuan of liquidity, according to central bank data. The Hang Seng Index rose on seven of those occasions. HSBC Jintrust expects a muted impact from this month’s cut.

Premier Li Keqiang says China has many tools to stabilise economic growth.


“The RRR cut is within market expectations and the PBOC has refrained from expanding the base currency in recent years,” Shen Chao, a strategist at HSBC Jintrust Fund Management in Shanghai. “It does not represent a shift in monetary policy. We expect the impact to be neutral.”

The central bank’s mini-stimulus came as China’s growth momentum waned over the past two quarters, hobbled by Covid-19 lockdowns, an energy crisis and a drop in home prices. Chinese authorities have also lately attempted to calm markets roiled by concerns over regulatory crackdowns and Chinese companies being booted off US exchanges.

Those concerns will persist for now, according to BCA Research, and the latest RRR cut will not alter its view on the outlook for the market. Strategists at the Montreal-based firm downgraded Chinese stocks to underweight in March on a one-year outlook, citing the risk of policy over-tightening.

The RRR cut “is unlikely to be a game changer for the Chinese economy,” the firm said in a report on Tuesday. “The more important drivers of China’s business cycle and financial markets are credit growth and investment. Both these variables impact economic conditions with a lag and have yet to rebound decisively.

For Invesco, the RRR cut is exactly what the Chinese economy needs to get it back on track, it said in a report on Tuesday. It is feasible that more RRR cuts are in store over the next year in order to stabilize growth, it added.

“Heightened market fears of a more serious slowdown could have pushed policymakers to enact the ‘Beijing put’ against further economic downturn and bolster market sentiment,” said David Chao, global market strategist for Asia-Pacific ex-Japan. “With this cut, policymakers are demonstrating a more forceful approach to prevent an all-out property market rout.”

The People’s Bank of China has trimmed banks’ reserve-requirement ratio 11 times since April 2018, injection a cumulative 8.2 trillion yuan in the process.


JPMorgan Asset Management expects the RRR cut to boost investment sentiment and support valuation in the stock market, its Shanghai-based global markets strategist Zhu Chaoping said.

“We expect to see A-shares’ outperformance in 2022 on the back of the current attractive valuation,” he said in a report. “However, investors should also bear in mind that the long-term reform goals, such as common prosperity, deleveraging and decarbonisation, remain on the table and may continue to weigh on the investment landscape.”

For analysts at Morgan Stanley, the PBOC’s decision is more a signal to support sentiment than a catalyst to notable credit growth rebound. Its recent “channel checks” show that banks have no aim to change their full-year credit plans at the end of 2021.

“Entering 1Q22, we think the partial removal of some demand-side bottlenecks together with more active fiscal policy could prevent credit growth from sliding further,” they wrote in a December 6 report.

Investors, however, could also be mistaken for chasing up some Chinese property stocks like Sunac China and Longfor Group following the RRR cut. The RRR cut was announced only after China Evergrande disclosed another failure to meet an offshore debt obligation, which suggests policymakers are not willing to bail out indebted developers, BCA Research said.

“Policy easing is unlikely to bolster China’s real estate sector,” it said. “A structural shift has occurred whereby property developers’ old business model – borrowing as much as they could and accumulating real estate assets – will not be profitable if home prices stop rising rapidly.”

Authors: Cheryl Heng, Zhang Shidong, SCMP

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