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By Swissquote Analysts
Themes Trading

China Outlook Improves with RRR Cut

By Peter Rosenstreich
Published on

While the markets were focused on events unfolding in Catalonia Spain, the People Banks of China (PBoC) continue to provide targeted monetary policy support. On September 27th, China announced new measures to loosen credit for small & medium sized business though a 25bp cut in Reserve Rate Requirement (RRR). The micro-tuning reduces the reserves needed to be held by banks, dependent on specific lending types. The policy action was driven by a increasing divergence between small and large business in official and Caixin PMI manufacturing gauges.

This weekends policy adjustment will keep China growth supported despite speculation of a cyclical slowdown. In fact, China's official PMI manufacturing printed a strong 52.4 against 51.7 prior read. China's 2Q GDP growth beat expectations with a 6.9% expansion rate. Following this positive trend, China economic data releases indicate that the global recovery is extending across regions and triggering investment. Supportive policy will furhter keep the ecomomic improvement on track. We do not see the RRR cut as the start of monetary policy shifting into an easing cycle but part of sustained micro-tuning strategy. China's decision to go at issues with a scalpel instead of a hammer indicates critical sophistication in policy setting.

The solid leadership has kept FX reserves stable, outflow limited and trend towards safe develerging. Longer-term dynamics makes Chinese companies poised for extensive revenue growth. Efforts by China to limited foreign access to key markets, mean domestic companies will get prime access to the largest and fast growing market in the world. Despite risks around N. Korea and fearmongering over credit bubble, equity investors are flooding into China. Hong Kong’s Hang Seng Index has shaken off recent political tensions outperforming the S&P easily in 2017. A trend that should continue into 2018.