The PBOC will reduce the RRR, impact on the economy and sectors

China’s decision to reduce the amount of funds banks must hold in reserve 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 announced on Friday that it would reduce the reserve requirement ratio (RRR) by 50 basis points for all banks, effective July 15. This move is expected to free up about 1,000 billion yuan (or $ 154 billion) in long-term cash. in the economy.

Minimum reserves represent the amount of money that banks must hold in their coffers as a proportion of their total deposits. A decrease in this required amount will increase the supply of money that banks can lend to businesses and individuals.

“We believe this widespread decline in the RRR could strengthen short-term market sentiment and improve stock market liquidity,” UBS analysts Lei Meng and Eric Lin said in a note on Monday.

In the near term, the move could boost liquidity-sensitive sectors, such as aerospace and defense, electronics, IT and media, according to UBS.

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

However, the market recovery could be short-lived given concerns about slowing China’s economic growth, the bank said.

“The reduction in the RRR has, to some extent, heightened concerns among equity investors that the economic recovery in Q2-Q3 (this year) may not be as good as the market expected,” analysts wrote. ‘UBS. “In our view, in the absence of a change in direction towards an easing of monetary policy, the additional liquidity will not lead to a sustained rally in the market.”

UBS analysts pointed out that investors are worried about the weakening pace of China’s economic recovery in the second and third quarters of this year – and that could weigh on the banking, insurance and financial sectors. consumption.

The Chinese central bank’s decision on Friday indicates the country recognizes the risks to China’s growth, analysts said.

“This is a signal, this is a more publicized message, I think, that the authorities are on the lookout and alert to the possibility of downside risks,” Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs said on Monday. , at CNBC “Street Signs Asia”.

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

The move “does not take away from the ‘cautious’ monetary position of the PBOC which is done with categorical easing,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in a note Monday.

He added that he is focusing on credit benchmarking – to restrict credit to sparkling or speculative sectors, while strengthening it for small and medium-sized businesses.

Varathan said the cornerstone of Beijing’s political calculation is still to mitigate a build-up of financial stability risks.