On February 24, policy makers in China lowered the Reserve Ratio Requirement (RRR) (Figure 1.1) for banks by 50 basis points for the second time since the fall of 2011. The chart below depicts that once Chinese central bankers embark on a particular monetary stance and direction, they remain consistent in continuance.
From late 2010 into the summer of 2011, the RRR was raised 10 times to fight off domestic inflationary pressures. I still expect the continuance of further easing to benefit global asset prices. To date we are in the early stages of that easing cycle. It will be important to monitor three components of the Chinese economy to telegraph further easing (or lack thereof): manufacturing, lending, and CPI.
Early last evening, the monthly China PMI (Figure 1.2) was reported at a better-than-expected 51.0. I suspect the reduction in the RRR had a positive impact on this figure. The attention now turns toward the March 8 CPI (Figure 1.3), which was reported last month at 4.5%. A benign reading of 4.0% or lower would clear the path for a third RRR cut early in Q2.
Figure 1.1 Reserve Ratio Requirement (RRR), October 2010 to Present
Figure 1.2 China PMI, March 31,2011 to Present
Figure 1.3 China CPI, March 31, 2011 to Present
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