China Cuts Reserve Requirement

From Finance Asia,

China’s central bank said it would cut banks’ reserve requirements on Friday, after a set of disappointing trade data. Effective May 18, it will cut the reserve requirement ratio for banks by 50bp to 20%, which it hopes will free up lending and stimulate a recovery — or at least avert a hard landing.

It will likely need to do much more, and soon, given the terrible data. Analysts surveyed by Bloomberg were expecting year-on-year import growth of 10.9% and export growth of 8.5% — far higher than the actual print of 0.3% and 4.9%, respectively.

The slow growth in imports helped China’s trade surplus to beat expectations, but that is hardly a positive sign. With a return to recession in the eurozone, China is more reliant on domestic demand than ever.

There was plenty of other bad news. Industrial production also missed estimates, with year-on-year growth during April of 9.3%, compared to expectations of 12.2%. Power output grew just 0.7%, down from 7.7% during March, while fixed asset investment and retail sales also missed.

Sell-side analysts have largely welcomed the move to cut reserve requirements, but it is a fairly weak response in the face of such bleak numbers. It will mean banks have more money to lend, of course, but it will do little to make their customers more keen to borrow it.

As I said, China’s monetary policies resemble that of the West, yet China’s equity markets, as of this writing, has seen little improvement since the announcement.

Further one would note how the financial sector have been yearning for more through comments like “fairly weak responses”.

From Bloomberg

Moreover, gold and oil has seen modest declines as of this writing, which also seemed to have ignored this additional stimulus.

But perhaps gold and oil’s response could be more about fresh reports of political stalemate in Greece which the markets see as increasing the odds for a Greece exit from the EU.