PBOC to cut RRR, impact on economy and sectors

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China’s move to slash banks’ reserves could boost market sentiment – and that could be good news for stocks in certain sectors, according to investment bank UBS.

The People’s Bank of China said Friday it would Lowering the minimum reserve ratio (RRR) increased by 50 basis points for all banks from July 15 by 50 basis points. The move is expected to free around 1 trillion yuan (or $ 154 billion) of long-term liquidity into the economy.

The reserve requirement represents the amount of money that banks must keep in their coffers in relation to their total deposits. Lowering this required amount will increase the supply of money banks can lend to businesses and individuals.

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“We believe that this broad-based RRR cut could boost market sentiment in the short term and improve liquidity in the equity markets,” said UBS analysts Lei Meng and Eric Lin in a statement on Monday.

Winner and Loser

The move could be in the short term crank according to UBS, liquidity-sensitive sectors such as aerospace and defense, electronics, IT and media.

Companies with strong earnings expectations could also outperform, UBS said, citing sectors like electric vehicles and batteries and the emerging energy sector.

However, given concerns about slowing economic growth in China, the market rally could be short-lived, the bank said.

“The RRR cut has, to some extent, heightened equity investors’ concern that the economic recovery in the 2nd” We do not believe that the additional liquidity without a change in direction to ease monetary policy will not fuel a sustained market rally. “

UBS analysts indicated that investors are concerned about the slowing pace of China’s economic recovery in the second and third quarters of this year – and this could weigh on the banking, insurance and consumer sectors.

“Strong headwind”

The move by China’s central bank on Friday signals that the country recognizes the risks to China’s growth, analysts said.

“It’s a signal, I think it’s a high-profile message, that the authorities are vigilant and vigilant for the possibility of downside risk,” Andrew Tilton, chief economist for Asia Pacific at Goldman Sachs, told CNBC’s Street on Monday Signs Asia “. .

Separately, Eurasia Group analysts said, “The move, which is expected to bring 1 trillion yuan into the economy, is in recognition of the strong headwinds for corporate profitability, financial stability and growth.”

The move “does not detract from the PBOC’s ‘prudent’ monetary policy stance, which comes with an emphatic easing,” Vishnu Varathan, head of economics and strategy at Mizuho Bank, said in a statement on Monday.

He added that it focuses on calibrating credit – to constrain credit to frothy or speculative sectors and empower them for small and medium-sized businesses.

Varathan said the cornerstone of Beijing’s political rationale is still to mitigate the increase in risks to financial stability.

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