China strikes first in 2019 with RRR cut


China makes its first policy move and cuts its reserve requirement ratio by 100 bps
Chief Investment Office07 Jan 2019
Photo credit: AFP Photo


In 4Q18 and 1Q19’s CIO Insights, we highlighted our Overweight calls on China and its Financials sector, on expectations of pro-growth policy stimulus, improving earnings fundamentals, compelling valuations, and sound balance-sheet quality. With the latest measure from the People’s Bank of China (PBOC), we reaffirm our constructive stance.

The PBOC announced last Friday (4 January) to cut its reserve requirement ratio (RRR)  by 100 bps, to be applied in two equal moves on 15 and 25 January. The main purposes are to replace the maturing of medium-term loan facilities (MLF) in 1Q19 and supply liquidity to the economy ahead of the Lunar New Year. At 3.30%, the 1-year MLF cost of funds is significantly higher than the 1-year savings deposit rate of 1.50%. Consequently, the repayment of MLF will immediately ease banks’ funding costs. The RRR cuts will free up longer-lasting liquidity at lower costs, compared with MLF.



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