Schroders Quickview: China stimulus rolled out as growth stalls

China's cut to Banks' reserve requirement ratio signals growth concerns after a weak first quarter, but should not be read as “Chinese QE” or an attempt to weaken the currency and we expect more rate cuts to come in 2015.


Craig Botham

Craig Botham

Emerging Markets Economist

China cuts Banks' reserve requirement ratio

A data-heavy week in China was capped at the weekend by a larger-than-expected 100 basis points cut to the reserve requirement ratio (RRR).

What does the rate cut mean in real terms?

The RRR move should inject roughly 1.2 trillion renminbi into the system, boosting bank profitability and lowering corporate and government borrowing costs.

How will the rate cut impact growth?

The cut is growth positive, but so far not out of line with our expectations.

Though we had forecast 100 basis points (bps) of cuts this year, our expectations had been for a pair of 50 bps cuts rather than a single larger move.

Sequential growth should receive a boost from the RRR cut, but base effects will mean it is a struggle for the Q2 year-on-year number to post a significant improvement.

We expect interest rate cuts this quarter, followed by one more RRR cut around Q3, as the authorities continue to target growth stabilisation.

What the cut tells us about previous China growth data

First quarter growth may have been weaker than the officially reported number; our China growth tracker pointed to an especially sharp fall in March, slipping from around 7% to 6.2%, year-on-year.

While we do not subscribe to the view espoused in some quarters that growth was 3 to 4% - based on the partial perspective of the economy provided by the Li Keqiang index – growth was likely weaker than reported and heading rapidly downhill.

Rate cut to compliment fiscal policy

To us this seems a move aimed at supporting and complementing fiscal policy this year.

Fiscal reform has seen local government fiscal efforts stall, and this provision of liquidity will help create demand for the 1 trillion renminbi in local government bonds set to be issued this year.

It will also provide funds for the planned infrastructure stimulus, largely the domain of state-owned enterprises and local governments.