China: Large liquidity injections from the PBoC – Nomura

FXStreet – Research Team at Nomura, suggests that according to their Monetary Policy Signal Index (MPSI; Bloomberg ticker: NMEIMPSI) – estimated based on a set of economic and financial indicators – suggests a high likelihood (0.93) of policy easing in February, similar to the final reading for January.

Key Quotes

“The high probability for February is mainly due to our forecast for large capital outflows and slower growth in January.1

The high MPSI reading suggests that the People’s Bank of China (PBoC) will continue its large liquidity injections in February. In January, some senior PBoC officials expressed a preference to inject liquidity over reserve requirement ratio (RRR) or benchmark interest rate cuts in the short term. The PBoC injected almost RMB2trn on a net basis in January to meet liquidity demand over the lunar new year and the January tax season, and to sterilise capital outflows (Figure 2). The strong demand for liquidity over the new year is only transitory; we expect liquidity injections in February to mainly be driven by the need to offset capital outflows and support economic growth.

The PBoC may eventually find it necessary to cut the RRR or benchmark rate as well, as weak economic growth may be masked by the macro data (such as the official PMI), as these indicators focus on large companies that tend to fare better than smaller corporates. The PBoC may find an urgent need to lower the financial cost across industries as a whole, using more effective policy tools. We maintain our call of four RRR and two benchmark interest rate cuts in 2016.”