China: More to Come

Published on October 23, 2015

China’s PBoC just announced a cut of 25 basis points in the benchmark interest rate from 4.6% to 4.35%, as well as a 50 basis point cut in the reserve ratio requirements for banks. While most analysts and market participants were expecting if not hoping for some stimulus on the monetary policy side at some point this year, there was no strong consensus in the markets on the magnitude or timing of these moves. As we had however flagged in SGH 10/13/15, “China: Breaking Below the 7% GDP Target:”

 

Along with a CPI that is expected to drop from the last 2% reading, a sub-7% GDP will also we believe trigger a cut by the People’s Bank of China in both the RRR (reserve requirement ratio) of 50 basis points, and a cut in interest rates of 25 basis points in the second half of October.

 

This of course is exactly what they did and is on the more positive and aggressive side of market expectations.

 

Looking ahead, China’s leadership will also be considering fiscal policy measures, specifically on Oct. 26-29 at the Fifth Plenary Session of 18th CPC Central Committee.

 

As a reminder, from what we understand a specific proposal high on the list will be for one trillion yuan in targeted tax cuts for SOEs (state-owned enterprises), especially those that can be shown to promote employment growth (see again SGH, “China: Breaking Below the 7% GDP Target”).

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