Asia in Focus_ China_ Monetary policy dilemma_ financial stability vs. pro-growth easing (Chen)

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the monetary policy landscape in China, particularly the People's Bank of China (PBOC) and its balancing act between financial stability and pro-growth easing [3][4][5]. Core Insights and Arguments - The PBOC has shifted its monetary policy stance to moderately loose from prudent, indicating a more proactive easing approach amidst domestic economic challenges [4][5]. - Despite expectations for significant policy rate cuts, the PBOC has prioritized financial stability, leading to elevated interbank repo rates and a delay in required reserve ratio (RRR) cuts [3][4][10]. - The central bank's recent actions reflect a long-standing dilemma: supporting economic growth through policy easing while maintaining financial stability, particularly in the context of foreign exchange (FX) management [5][6][24]. - The report forecasts two 50 basis point (bp) RRR cuts in Q1 and Q3 of 2025, alongside two 20bp policy rate cuts in Q2 and Q4, to address persistent deflationary pressures [3][31][35]. - The average RRR in China is currently around 6.6%, which is higher than in many major economies, suggesting room for further cuts [40]. Important but Overlooked Details - The PBOC's balance sheet shrank by RMB 1.6 trillion in 2024, raising concerns about monetary tightening, primarily due to a 100bp RRR cut that released RMB 2 trillion of liquidity [19][21]. - The report highlights that the PBOC's liquidity management strategy has evolved, with a shift from medium-term lending facilities (MLF) to increased use of reverse repos [17][20]. - FX stability remains a top priority for the PBOC, with the USD/CNY fixing kept below 7.20 to manage market sentiment amid ongoing US-China trade tensions [24][25]. - The anticipated fiscal package at the "Two Sessions" and accelerated government bond issuance are expected to facilitate RRR cuts, although the PBOC may opt for low-profile tools like reverse repos if bond market conditions worsen [10][35]. Conclusion - The PBOC's current monetary policy reflects a complex interplay of domestic economic needs and external pressures, with a cautious approach to easing that prioritizes financial stability over aggressive rate cuts [5][6][24].