China Loosens Monetary Policy Further as PBOC Scraps Repo Sales
Comment of the Day

November 27 2014

Commentary by Eoin Treacy

China Loosens Monetary Policy Further as PBOC Scraps Repo Sales

This article for Bloomberg News may be of interest to subscribers. Here is a section: 

Industrial profits in China fell 2.1 percent from a year earlier in October, the biggest decline since August 2012, government data showed today.

The halt to repo sales was “an expected move following the rate cut in the previous week,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. “Market interest rates remain sticky in general. This reflects a policy dilemma faced by the Chinese authorities as the rate cut alone cannot manage market expectations.”


?There will probably be two more rate cuts by mid-2015, each by 25 basis points, and banks’ reserve-requirement ratios are forecast to be lowered by 150 basis points cumulatively next year, HSBC Holdings Plc economists Qu Hongbin and Julia Wang wrote in a Nov. 24 report.

Eoin Treacy's view

In the environment of ultra-low interest rates and extraordinary monetary policy we have been accustomed to it is easy to forget that during this time China has been reloading its central bank’s arsenal of policy tools. 

Interest rate differentials are high relative to other major economies, bank reserve requirements are in the region of 20% versus low single figures elsewhere, the currency remains close to highs not seen in 20 years and aggressive measures are in place to withhold credit from property investments among other tools.

As economic growth moderates efforts are underway to bolster the consumer economy but one of the most effective measures would be to liberalise the financial sector and increase the availability of credit to consumers. As the tone of the PBOC’s policy becomes more dovish it has ample room to ease policy further. 

The CSI 300 Index has now returned to test the 2012 highs and while some consolidation of recent gains is a possibility, a sustained move below the 200-day MA would be required to question medium-term recovery potential. 

The CBOE China Index of US listed Chinese shares has held a progression of higher reaction lows since 2012 and is currently firming from the region of the 200-day MA. A sustained move below 700 would be required to question medium-term scope for additional upside. 

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