The People’s Bank of China announced a full RRR cut of 0.5 percentage points last Friday and an additional 1 percentage point reduction for some eligible city commercial banks, releasing a total of 900 billion yuan in funds to the market
Citigroup believes that this action will release a strong signal: the tendency of policy easing is expected to continue to “steady economy" by the end of the year. The Mainland will also introduce more stimulus measures to ensure sufficient employment growth and maintain social stability. We also expect the PBOC to cut interest rates, especially the opportunity to lower the medium-term loan convenience to win the bid rate.
Financial development, infrastructure investment speed
The State Council earlier announced that in order to cope with the downward pressure on the economy, the fiscal policy will use the local special bond amount next year and clarify the conditions for the use of special bonds as capital, which will expand the financial resources for local governments and stimulate stagnant infrastructure investment. We believe that infrastructure investment has been weaker this year, owing to the limited use of local special bonds. The new measures may be expected to stimulate investment in infrastructure projects in the Mainland. At the end of the year, the growth rate will rise to 8% and increase by 0.5 percentage points for the overall economic growth for the rest of the year.
There may be some concerns about a series of easing measures or pressure on the RMB exchange rate, but it should be noted that while the mainland is making moves, the US Federal Reserve is also tending to be loose
The recent weakness of the renminbi is mainly dragged down by the trade war and the worsening investment climate. If monetary and fiscal easing policies can rebuild market confidence and trade negotiations progress, this may further boost the performance of the RMB exchange rate and Chinese stocks.