China Cuts Reserve Ratio One Day After G20

In the “uninspiring” communique delivered following the G20 in Shanghai, officials pledged to “consult closely” on FX markets.

Presumably that was a reference to China’s “surprise” August 11 deval and the PBoC’s move in December to adopt a trade weighted basket as a reference point for the RMB, a move that telegraphed lots of downside for the currency.

Well, we’re not sure whether there was any “close consulting” between the PBoC and its counterparts around the world on Monday, but China just announced another RRR cut (50 bps), the fifth such move since early last year.

To be sure, it’s not surprising that Beijing resorted to more easing. They’ve got all kinds of counter-cyclical breathing room compared to their DM counterparts. It is, however, somewhat surprising that they would move to ease just a day after the G20 when everyone in attendance pledged to avoid competitive currency devaluations on the way to acknowledging that “monetary policy alone cannot lead to balanced growth.”

Following the RRR cut, the offshore yuan fell further and swaps fell the most in nearly two months.

Recall what we said on Saturday: “… the great yuan devaluation will continue unabated as will the competitive easing.”

We’ll now get a chance to see what the half-life on PBoC easing is these days. Here’s what Chen Jiahe, a strategist at Cinda Securities, said in Shanghai: “There’s a big chance that A shares will open higher tomorrow morning after the RRR cut. The cut in banks’ reserve-requirement ratios will help offset the reduction in base money caused by a decline in funds outstanding for foreign-exchange reserves and ease liquidity conditions. The move will definitely lift stock market sentiment. Blue-chip stocks may get a boost tomorrow due to their high correlation to the economy.” That’s good, because Chinese equities just fell 3% overnight to start the week.

Summing things up nicely is this rather amusing tweet: