The week in renminbi: PBoC announces RRR cut, FX reserves are down, China to support foreign investment

In this round-up, the People’s Bank of China announced a further cut to banks’ reserve requirement ratio (RRR) on Sunday, the Mainland’s foreign exchange reserves dipped in September, and China’s state council prepares measures to support foreign investment.

  • By Paolo Danese
  • 10 Oct 2018
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To welcome traders back from the Golden Week holiday, the PBoC announced the year's fourth RRR cut on October 7, effective next Monday. The cut will release Rmb450bn ($65.bn) for banks to swap for maturing medium term lending facility (MLF) operations, and an additional Rmb750bn in liquidity.

"While we have been expecting one RRR cut per quarter in H2, the 1pp magnitude surprised us on the upside," MK Tang, an economist with Goldman Sachs, wrote on the same day. "The cut will [...] apply to a wide range of banks, including large commercial banks, joint stock commercial banks, city commercial banks, non-county rural banks and foreign banks."

Analysts agreed the cut sends a further easing signal to address rising stress in the market amid growth concerns in China.

"We expect further monetary easing, especially to encourage credit growth, and continued measures to manage capital outflow risks," Helen Qiao, China and Asia economist at Bank of America Merrill Lynch, said in a report on October 8.

While the authorities said they do not expect the move to increase the depreciation pressure on the renminbi, some disagreed.

"We expect the RMB to face mounting pressure at the start of the new trading week due to narrowing interest rate differential expectation as a result of rising US yields and possible decline of longer end Chinese yields due to RRR cut,"  Tommy Xie head of Greater China research at OCBC, wrote. "We think China may rely more on administrative measures to keep the RMB exchange rate in check."

Goldman's Tang, however, said the focus on currency stability would remain.

"In our view, given the growth headwinds in store, we still expect interbank rates to be managed down a bit notwithstanding likely higher CPI inflation," he said. "But given the authorities' focus on broad CNY stability, we see a fairly steady CNY in the near term (though with a weakening tilt over a six-month horizon)."

The RRR cut was introduced as an incentive for banks to support the real economy, in particular smaller private companies. Xie noted smaller banks would benefit the most from the liquidity injection.

Others were unsure whether the cut would be enough of a stimulus.

"This move should be helpful but not enough to the slowing economy," wrote Wei Yao, chief China economist at Société Générale. "This week sees the release of trade data for China. We expect export momentum to have moderated in September but we think that the impact of trade tariffs has yet to show up fully in the trade data. Also this week, we expect bank lending in China to rebound, although shadow banking activities still remain a drag."

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Continued pressure on the RMB was also reflected in a drop in China's foreign exchange reserves in September. The PBoC said on October 7 that reserves stood at $3.087tr, down $22.7bn on a monthly basis. They had fallen by $8bn in August.

"We estimate that the currency valuation effect was about -$2bn in September," wrote Goldman's Tang in a separate report on October 7. "Excluding such estimated effects, reported FX reserves were down by about $21bn (vs about nil in August after excluding FX effects).

“In the official statement, [the State Administration of Foreign Exchange] said the rise in global yields was one factor for the decline in reserves. Based on historical observations, though, it is not clear to what extent reported FX reserve readings take into account asset price changes.”

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Chinese premier Li Keqiang re-stated the government's support to foreign business in an October 2 state council meeting.

Li promised China would make the business environment for foreign investors fairer, more convenient and predictable. He added that China would seek to simplify procedures, decentralise powers, enhance supervision and optimise public services. He noted China would expand the scope of foreign investors' exemptions from income taxes. Previously, only profits that were directly reinvested in a certain list of encouraged investment projects were exempted. Now, all foreign investment projects, other than prohibited ones, are eligible for this preferential tax treatment. Third, the regulators would work on improving intellectual property protection laws and local government supervision procedures.

“Policies and regulations have direct guiding influences on the market expectations," Li said. "Currently, we are introducing policies that can stabilise market expectations and create a fair and equal business environment for all ownership enterprises, including foreign ones.”

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Chinese state media reported that China's outbound direct investment was $158.3bn in 2017 the third largest amount after the US and Japan. Volume was down 19.3%, the first yearly fall since 2003. The report, however, noted that Chinese investments in Europe and Africa were up 70% in the same period. Investment in countries along the Belt and Road made up 12% of the total, up 31.5% from a year earlier.

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Average daily volume of trading in Chinese bonds on the Tradeweb electronic platform stood at $500m in September, Tradeweb said in a monthly activity report published on October 4. The ADV was down 3.4% on a monthly basis but up 21.2% on the same month of 2017.

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GlobalRMB Panda Bonds league table

Rank Arranger Share % by Volume
1 China Merchants Securities Co 18.01
2 Industrial and Commercial Bank of China (ICBC) 15.02
3 CITIC Securities 10.77
4 Agricultural Bank of China (ABC) 9.79
5 China CITIC Bank Corp 8.81

Panda Bond Database

Pricing Date Issuer Country Size Rmb (m)
1 11-Oct-18 Global Logistic Properties via Iowa China Offshore Holdings Hong Kong 1,200
2 28-Sep-18 Trafigura Singapore 700
3 17-Sep-18 The Wharf (Holdings) Hong Kong 2,000
4 10-Sep-18 China Gas Holdings China 1,500
5 20-Aug-18 ABC International (parent: Agricultural Bank of China) China 3,000

Offshore RMB Bond Top Bookrunners

Rank Bookrunner Share % by Volume
1 Standard Chartered Bank 33.31
2 HSBC 20.53
3 Societe Generale 4.21
4 Bank of Taiwan 3.60
4 Cathay United Bank 3.60

Latest Offshore RMB Bonds

Pricing Date Issuer Country Size Rmb (m)
1 19-Sep-18 Agricultural Development Bank of China (ADBC) China 1,200
2 17-Sep-18 Hitachi Capital (UK) United Kingdom 600
3 13-Sep-18 CIFI Holdings China 1,000
4 05-Sep-18 Daimler Germany 1,000
5 03-Sep-18 First Abu Dhabi Bank PJSC United Arab Emirates 650