PBoC: Strong headwinds call for no rate hike and a RRR cut – Nomura

Analysts at Nomura believe Chinese economic conditions are another concern for policymakers.

Key Quotes

“We forecast growth will worsen before finally improving in coming months. Despite the Chinese government’s determination to unwind its ill-planned deleveraging efforts and start a new round of policy easing, we think room for policy stimulus is limited compared with previous easing cycles and a growth rebound has not yet materialised.”

“We also expect an escalation of US-China trade tensions and the fallout of some EM economies to weigh on China’s export growth.”

“Does the currency limit the PBoC’s room for monetary easing?

We do not think so. The PBoC started intervening in early August when USD/CNY breached the psychologically important 6.9 threshold. With the resumption of direct intervention in USD/CNY fixing, much tighter capital controls and still relatively large FX reserves (USD3.1trn as of end-July), we believe the PBoC is both willing and able to deliver a relatively stable USD/CNY around current levels in the near term (say before year-end).

The PBoC is reluctant to let USD/CNY move higher on domestic stability concerns and because of ongoing negotiations with the US on trade issues. We think the PBoC has no intention of forcing RMB to appreciate either, as it needs to stem the ongoing growth slowdown.”