Instant Thoughts. Ryan Lam, CFA. 18 April PBoC s Ambush Rattled the Market. Head of Research

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Ryan Lam, CFA Head of Research ryan.lam@shacomb

hk +852 2841 5283 Instant Thoughts 18 April 2018 PBoC s Ambush Rattled the Market The People s Bank of China announced a reduction of 1ppt in required reserve ratio for major banks, effective from 25

1 Ryan Lam, CFA Head of Research Instant Thoughts 18 April 2018 PBoC s Ambush Rattled the Market The People s Bank of China announced a reduction of 1ppt in required reserve ratio for major banks, effective from 25 April. On net, a windfall of RMB400bn will be injected into the banking system. The primary objective seems to be to facilitate repayment of the expiring MLF position. In our view, there are two motivations behind this overt move. First, it serves as a liquidity redistributor. Small banks that have received less MLF funding will be the most blessed from this liquidity swap. Second, reduced demand for collateral under the MLF helps put a lid on volatility in the interbank rate. A common thread linking these apparently random motivations comes to our mind preparations for financial liberalization. If the PBoC sees structural needs to retire MLF, further RRR cut cannot be ruled out. The MLF costs 2.75%-3.25% while unfrozen funds from RRR means a loss of 1.62% interest income, in effect the move will lower interbank funding costs. The market may probably trade CGB yields lower across the curve. After market close yesterday, the People s Bank of China announced a reduction of 1ppt in required reserve ratio (RRR) for major banks, effective from 25 April. Other banks, already enjoying earlier targeted RRR cut, will be excluded from this round of easing. In total, RMB1,300 billion is to be unfrozen. As per PBoC s request, the released liquidity will be used to repay medium-term lending facility (MLF) balance. On net, a windfall of RMB400 billion will be injected into the banking system. This amount is equivalent to a 25bp universal RRR cut.

2 Exhibit 1: Required Reserve Ratio (%) /2010 1/2011 1/2012 1/2013 1/2014 1/2015 1/2016 1/2017 1/2018 Large depository institution Small and medium-sized depository institution 0 Source: CEIC, Shanghai Commercial Bank How to interpret the surprise decision? This is more than a precautionary move. The early time of the RRR cut is a surprise since it came against the rosy picture painted by the Q1 GDP figures. We have no trouble in believing that the RRR cut may find its root in cyclical considerations, such as slower-than-expected credit growth in March, rising trade tension as well as the arrival of tax season in the second half of April. But this is not to say structural force has no role to play here. Judging from the book from its cover, the primary objective seems to be to facilitate repayment of the expiring MLF position. Why fix it if it ain t broke? There are two motivations behind this overt move, in our view. First, it serves as a liquidity redistributor. Small banks that have received less MLF funding will be the most blessed from this liquidity swap. Second, reduced demand for collateral under the MLF helps put a lid on volatility in the interbank rate. A common thread linking these apparently random motivations comes to our mind preparations for financial liberalization. We hence see the RRR cut more than a precautionary move, but as a part of the grandiose plan of financial liberalization. More RRR cuts in the pipeline. If the PBoC sees structural needs to retire MLF, further RRR cut cannot be ruled out, given MLF will still have about RMB4,000bn outstanding after this tranche of repayment.

3 A downward shift in RMB yield curve. The MLF costs 2.75%-3.25% while unfrozen funds from RRR means a loss of 1.62% interest income, in effect the move will lower interbank funding costs. A return to use of RRR adjustment a tool gives banks greater certainty in managing liquidity will lower term premium as well. The market may probably trade CGB yields lower across the curve post the RRR adjustment.

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Instant Thoughts. Ryan Lam, CFA. 13 April HKD in the Crosshairs. Head of Research

Instant Thoughts. Ryan Lam, CFA. 13 April HKD in the Crosshairs. Head of Research Ryan Lam, CFA Head of Research ryan.lam@shacombank.com.hk +852 2841 5283 Instant Thoughts 13 April 2018 HKD in the Crosshairs In this note we clear up some commonly-cited misconceptions. Only when private