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It takes two to tango – Standard Chartered

The PBoC today announced huge cuts in RRR and policy rates. Monetary easing would be less effective without proactive fiscal policy, more bond financing is likely. Chinese interest rates to fall further on faster rate cuts, USD-CNY could test below 7.0 on improving risk sentiment, Standard Chartered economists note.

Fiscal measures likely to follow

“The governor of the People’s Bank of China (PBoC) announced a 50bp cut in the reserve requirement ratio (RRR) and a 20bp cut in the policy rate, both double the normal size, along with a number of other measures to support the real estate market and the stock market. Pan also gave early guidance on a possible RRR cut (25-50 bps) in Q4.”

“We expect the PBoC to maintain its easing pace over the next few quarters amid possible further Fed rate cuts. We now expect a 25bps RRR cut in Q4, on top of our previous forecasts of a 25bps cut in both Q1 and Q3-2025. Additionally, we now see a 10bp cut in the policy rate in Q2-2025, on top of our previous forecasts of a 10bp cut in both Q4-2024 and Q1-2025.”

“Within the overall public budget, a decline in tax revenue and relatively rigid spending responsibilities may give rise to a financing gap of CNY 0.5-1.0 trillion this year, according to our estimates. We see a high probability that the government will increase bond issuance to fill the gap. Within the government funds budget, we see an opposite risk, that is, an understatement of the budget deficit with a slow pace of deployment of government bond revenues.”

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