PBOC cuts Bank Reserve Ratio Requirement (RRR)
On Saturday, May 12, the People’s Bank of China reduced the Reserve Ratio Requirement (RRR) for banks by 50 basis points, effective May 18. This is the third reduction of the RRR in the past five months. This move is consistent with expectations expressed in my May 1 China PMI blog and perfectly timed given recent economic data.
This week’s worse than expected Chinese economic data:
- April CPI recorded a benign 3.4% reading, providing central bankers room to focus on stimulating growth (Figure 1.1)
- New yuan loans came in at its lowest level for 2012 (Figure 1.2)
- Industrial production rose 9.3%, the smallest gain since Q2 2009 (Figure 1.3)
- Exports rose only 4.9%, well below the 8.5% expectation
- Imports rose only 0.3%, well below the 10.9% expectation
In the wake of this week’s disappointing economic data, China 2012 GDP projections (Figure 1.4) are being lowered by analysts to between 7.5% and 8%. I would expect that when Q2 GDP is reported around July 12, a sub 8% print is more than likely. The first quarter of 2012 printed an 8.1%, down from Q4’s 8.9% reading.
However, I still expect that China has both the monetary and fiscal tools at its disposal to prevent its landing from being anything other than soft. Continued easing from China will be a tailwind for the global capital markets during the second half of 2012.
In the near term, the China easing tailwind will do intense battle with the multiple strong headwinds of FOMC uncertainty, European recessions, and a now emboldened financial market regulation platform taking attention away from tackling the 2013 fiscal cliff. I expect the tug of war will persist and keep the S&P 500® Index (SPX) (Figure 1.5) in a difficult sideways consolidation trading range for much of Q2.
Figure 1.1 China CPI, June 2008 to Present
Figure 1.2 China New Yuan Loans Year To Date
Figure 1.3 China Industrial Production, May 2009 to Present
Figure 1.4 China GDP, June 1997 to Present
Figure 1.5 S&P 500 Index (SPX), October 2011 to Present