Chinese Recovery: People’s Bank of China’ RRR Cut Might Be Good for Stocks

Chinese recovery from the pandemic is slowing down, prompting the global economies to question how durable their comebacks will be. Still People’s Ban...
Chinese Recovery: People’s Bank of China’ RRR Cut Might Be Good for Stocks
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This story originally appeared on ValueWalk

Chinese recovery from the pandemic is slowing down, prompting the global economies to question how durable their comebacks will be. Still People’s Bank of China (PBOC) cut on reserve requirement ratio could mean good news for stocks.

Q2 2021 hedge fund letters, conferences and more

Strong Headwinds

Despite PBOC saying that the move does not represent a stimulus push, “the breadth of the 50 basis-point cut to most banks reserve ratio requirement came as a surprise,” as reported by Bloomberg.

Data yielded from a Bloomberg poll of economists foresees that China’s gross domestic product will slow down to 8% in Q2 from a record gain of 18.3% in Q1. “Key readings of retail sales, industrial production, and fixed asset investment are all set to moderate too.”

Although the slowdown was expected at some point with 2020’s low base effect dwindling,  economists assert that deacceleration has arrived sooner than expected, and is set to send shockwaves across the world economies.

Rob Subbaraman, head of global markets research at Nomura Holdings Inc. said: “There is no doubt that the impact of a slowing China on the global economy will be bigger than it was five years ago.”

“China’s ‘first-in, first-out’ status from Covid-19 could also influence market expectations that if China’s economy is cooling now, others will soon follow,” he added.

Good News for Stocks?

During Saturday’s 20 finance ministers meeting in Venice, there was significant talk of pandemic-related threats sabotaging the brittle global upturn, as COVID-19’s new variants and the lopsided vaccination process are casting doubt on a steady world economic.

According to Wei Yao, chief economist for the Asia Pacific at Societe Generale SA., “China’s growth slowdown should mean near-term disinflation pressures globally, particularly on demand for industrial metals and capital goods.”

However, PBOC’s broad-based RRR cut and subsequent $154 billion release could be good news for stocks in specific industries, as “it could boost market sentiment in the short term and improve stock market liquidity,” according to UBS analysts Lei Meng and Eric Lin.

“The RRR cut has, to some extent, added to equity investors’ concerns that the economic recovery in Q2-Q3 (this year) may not be as good as the market expected,” they were quoted on CNBC.

“In our view, in the absence of a directional shift to monetary policy loosening, the additional liquidity will not drive a sustained market rally.”

Meanwhile, Vishnu Varathan, head of economics and strategy at Mizuho Bank, asserts that PBOC’s move focuses on “calibrating credit — to restrain credit to frothy or speculative sectors, while boosting it for small- and medium-sized enterprises.”

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