(19 December 2019)DAILY MARKET BRIEF 2:PBoC easing bias maintained ahead of Chinese New Year

Now that details of the Phase One deal are getting finalized and partial tariffs rollback are subsequently published, the People’s Bank of China is determined to keep up with easing of monetary policy. After cutting its 7-day reverse repo rate to 2.50% (prior: 2.55%) for the first time in four years, the PBoC recently took similar steps by lowering the 14-day reverse repo rate to 2.65% (prior: 2.70%) to guarantee ample monetary conditions ahead of year-end holidays. Yet major decisions are nearing as the PBoC is expected to cut its 1-year loan prime rate on Friday while additional easing steps, including a lower reserve requirement ratio could well occur at a later stage in 2020. With Chinese authorities willing to put a brake to this year’s aggressive fiscal policies announced earlier in November, including CNY 2 trillion ($284 billion) tax cuts and 2.15 trillion special local government bond issuance and rather focus on stabilizing the economy, there is no surprise as to why the PBoC is taking over.

Despite stabilizing economic conditions, it appears that risks remain high in the Chinese economy, as shown by fixed asset investments maintained at an historical low of 5.20% (prior: 5.20%) in November while foreign direct investments mark at a twelve month bottom for the same month. In this context, the PBoC is expected to ensure adequate liquidity needs, with tomorrow’s decision likely to conclude with a cut of 0.05 percentage point to 4.10 of its 1-year loan prime rate, the third for the year, after taking similar decisions on the medium-term lending facility rate. Looking forward, it seems that the medium-term lending facility rate should play a key role in the PBoC’s monetary policy guidance while next year should certainly see further PBoC monetary policy easing announcements given the current stance of Chinese policy makers. Although the recent CNY weakness (USD/CNY: +0.46% week-to-date) should be maintained at first sight considering current dovish bias, we would temper the view considering the currency agreement signed with the US under the Interim Agreement, due for signature along January 2020. PBoC fixing is now at 7.0025 (prior: 6.9969), above 6.9915 low from three days ago.

By Vincent Mivelaz