Updated: The week in review: RRR cut takes effect, China’s industrial production slumps, Safe eases foreign debt limits
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Updated: The week in review: RRR cut takes effect, China’s industrial production slumps, Safe eases foreign debt limits

PBOC_China_PA_230X150_16Mar20

In this round-up, the reserve requirement ratio cut in China went into effect on Monday, the country’s industrial output declined sharply in the first two months of the year, and the State Administration of Foreign Exchange lifted the cap on outstanding foreign debt of Chinese issuers.

The People’s Bank of China (PBoC) announced a targeted RRR cut late last Friday afternoon to support small and medium enterprises (SMEs). All banks qualified for the central bank’s inclusive finance programme will benefit from a 50bp-100bp RRR cut. Qualified joint-stock banks will get an additional 100bp reduction in their RRR. The cuts went into effect on Monday morning.

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China’s industrial output in the first two months of the year shrank 13.5% year-on-year. In February alone, industrial output dropped by 26.63% from January, according to data published by the National Bureau of Statistics on Monday morning. State-owned and privately-owned enterprises saw their industrial production declining by 7.9% and 20.2%, respectively.

In the same period, fixed income investment and retail sales also fell by 24.5% and 20.5% year-on-year, respectively. Revenue from the food and beverages sector declined by 43.1%.  

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The State Administration of Foreign Exchange announced last Friday that it will raise the “macro-prudential adjustment parameter” from 1 to 1.25. The change indicates that Chinese corporations and financial institutions can borrow 25% more foreign debt than before.

The parameter is one of the three factors in a formula Safe and the PBoC use to calculate the maximum amount of outstanding foreign debt a Chinese issuer can have. The other two factors are the issuer’s net asset and its cross-border financing leverage ratio.

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The US Federal Reserve cut the benchmark interest rate by a full percentage point on Sunday to a range of 0%-0.25%, a level not seen since 2015. It will also boost its bond holdings by $700bn.

The latest emergency cut comes less than two weeks after the Fed sliced the benchmark rate by 50bp.

“While the list of measures is extensive, the market had almost fully priced in the policy rate cut by [last] Wednesday, so the rates surprise was modest,” Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered, wrote in a Monday morning note. “The initial equity-market response was ultra-negative, with futures going limit down right at the open.”

Following the Fed’s decision, the Hong Kong Monetary Authority also cut the base rate on Monday to 0.86% with immediate effect.

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In line with the promises in the US-China phase one trade deal, the China Securities Regulatory Commission confirmed on Friday that it will lift the 51% cap on foreign ownership of onshore securities houses on April 1.

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The Chinese State Council has decided to delegate land conversion approval power to provincial governments.

According to an official announcement from the State Council, governments of provinces, autonomous regions and municipalities will be given the right to approve the conversion of agricultural land – except for permanent basic farmland – into construction land.

However, eight local governments – Beijing, Tianjin, Shanghai, Jiangsu, Anhui, Guangdong, Zhejiang and Chongqing – have received the right to approve the conversion of permanent basic farmland into construction land as well.

“This will not give provincial governments the power to increase the total scale of land used for construction,” Trivium, a consulting company, wrote in a Friday note. “But it will make it easier for provincial governments to allocate land with a view to attracting investment.” This story was corrected on April 1 to reflect that all qualified banks will enjoy a 50bp-100bp RRR cut instead of 50bp as previously stated. 

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