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PBoC: Potential liquidity injection equivalent to 45bp cut in RRR - Nomura

FXStreet (Bali) - Nomura notes that if the reports of a 500 bn yuan liquidity injection into the top 5 Chinese banks by the PBOC, via SLF, is confirmed, it would suggest that policymakers are sensitive to the significant weakening seen in the August activity data, adding that the effect of the liquidity injection would be equivalent to a 45bp cut in the bank reserve requirement ratio (RRR).

Key Quotes

"If this is confirmed, we estimate the effect of the liquidity injection to be equivalent to a 45bp cut in the bank reserve requirement ratio (RRR). The difference is that an RRR cut is more permanent and would increase the money multiplier, while use of the SLF expands the monetary base over a shorter period of time (in this case, three months). The PBoC has the discretion to decide whether or not to roll over the SLF loans after the three months."

"If the reports are confirmed, we believe such a move highlights the fact that China‟s policymakers are sensitive to the significant weakening seen in the August activity data, and the move would be in line with our call that monetary policy will be eased further to boost the economy."

"However, at the margin such a move would reduce the likelihood of our near-term forecast of a 50bp broad-based RRR cut in September. It would be a sign that policymakers prefer to continue with piecemeal, targeted easing measures, though we believe it also raises the level of uncertainty over how effective such technical measures are in arresting the broad growth slowdown. Looking further ahead, we continue to expect one 50bp RRR cut per quarter from Q4 2014 to Q4 2015. While not our base case, if growth decelerates further in the coming months we would expect more substantial policy easing measures, including an interest rate cut."

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