Macro Monday:A week of stabilized RMB and heavy liquidity injection from the PBoC

A tough January for global markets: Last week H-shares rebounded 2%,snapping a four-week losing streak. Energy stocks led the recovery as oilprices have rallied over 30% from the bottom on Jan 20. A-shares, however,slumped again by another 6% over the disappointment on delayed RRR/ratecuts. On the currency front, the RMB was little moved last week thanks to thePBoC’s intervention while the HKD also stabilised at 7.79 after a roller-coasterride in the week before (Fig 38 and 39). For the whole of January, H-sharesshed 15% while A-shares lost 23%.

Heavy injection of liquidity to meet new year demand: The PBoC nowviews that cutting the RRR is too high-profile and could weigh on the RMB.

Therefore, it has refrained from cutting the RRR over the past two weeks, butstill managed to inject nearly RMB2tn (equivalent to 150bp RRR cut) throughreverse repo and SLO. That said, compared to RRR cuts, these liquidity toolsare temporary in nature and costly for banks which have to pay interest onborrowed money, while banks could obtain liquidity with zero cost from alower RRR. As such, when the RMB depreciation expectation recedes, thePBoC could still cut the RRR to release liquidity to the banking system.

RMB stability remains the priority for now: Over the past ten days, thePBoC consistently set daily fixing around 6.55, regardless the previous day’sclosing (Fig 38). Ironically, the goal of last Aug’s reform is just to align thesetwo. In any case, by doing so, the PBoC sent a strong signal of a stable RMB.

It marks a sharp U-turn from what it did in the first week of Jan, when thePBoC accelerated the RMB depreciation and spooked the markets. Lookingahead, in the next one or two months, we expect the PBoC to keep a tight gripon the RMB. A stable RMB could provide a more benign backdrop for themarkets than the past month, as it could help reduce capital outflows. Fig 40shows that capital outflows surged last Aug when the RMB unexpectedlydevalued on Aug 11. However, as the RMB stabilized after that, capitaloutflows eased as well. But capital outflows picked up again after the RMBresumed depreciation from Nov. For this Jan, China’s FX reserves couldeasily drop another US$100-150bn due to the accelerated depreciation earlierthat month. But we expect capital outflows to improve from Feb thanks to astabilized RMB lately. That said, we see another testing point could come inlate March or April, when a possible ECB easing in March and expectations ofa Fed hike in June could send US$ stronger and weigh on the RMB then.

Is the economy in a hard landing? In the past five years, every year therewas a point when pundits claimed that “China is in a hard landing!” Now it’ssuch a moment again. While the economy remains pretty weak, we see littleevidence suggesting that the fundamentals have deteriorated sharply over thepast few months. Instead, while the economy is still slowing down, mainlydragged by the financial sector, the deceleration is in a gradual way (see ourdata preview for Jan). Instead of dwelling on indicators mainly determined bythe industrial sector (we argued two years ago that Li Keqiang index is muchless relevant these days), we prefer to take a more nuanced view on China’seconomy by digging deeper into various data across regions and industries(see a note we published last week: China in 2015: Huge divergence).

We will not publish Macro Monday next week due to the Chinese New Yearholidays. To our readers, Kung Hei Fat Choi!