China: It takes two to tango – Standard Chartered

PBoC announced outsized RRR and policy rate cuts today. Monetary easing would be less effective without proactive fiscal policy, more bond financing is likely. China rates to fall further on faster rate cuts, USD-CNY may test below 7.0 on improved risk sentiment, Standard Chartered economists note.

Fiscal measures likely to follow

“Governor Pan of the People’s Bank of China (PBoC) announced a 50bps cut to the reserve requirement ratio (RRR) and a 20bps cut to the policy rate, both doubling from the normal size, together with a range of other measures to support the housing market and stock market. Pan also provided forward guidance on a possible RRR cut (25-50bps) in Q4.”

“We expect the PBoC to maintain the easing momentum in the next few quarters amid likely further Fed rate cuts. We now expect a 25bps RRR cut in Q4, in addition to our previous forecast of a 25bps cut in both Q1 and Q3-2025. In addition, we now see a 10bps policy rate cut in Q2-2025, on top of our previous forecast of a 10bps cut in both Q4-2024 and Q1-2025.”

“Under the general public budget, a decline in tax revenues and relatively rigid spending responsibilities may give rise to a financing gap of CNY 0.5-1.0tn this year, according to our estimate. We see a high likelihood of the government increasing bond issuance to fill the gap. Under the government funds budget, we see an opposite risk, i.e., an undershooting of the budget deficit with a slow pace of deployment of government bond proceeds.”