China announced another 50bps cut to the banks’ require

d reserve ratio (RRR) on Saturday, effective February 24. This is the second RRR cut (the first was on 30 Nov 2011) since inflation peaked in July 2011, and should release some CNY 370bn in funds. The RRR will now be 20.5% for big banks and 18.5% for smaller banks.(a.k.a. an average RRR of 20% for the whole banking system). After the lack of a RRR cut during the New Year, some had argued that cuts were off the agenda; we held our call for five cuts in 2012. (Four more to go then!). We see the cut as the continuation of a gradual loosening agenda, and should be supportive for risk sentiment. However, even controlling for New Year effects the China data is looking weak, and we believe there is more growth downside to come before we see evidence of recovery in Q2.

There continues to be a good debate about whether these RRR cuts amount to substantial loosening or are just a way for PBOC to stabilise inter-bank rates in the 3-4% range. Chart shows o/n repo pushing up again last week, partly thanks to the big CCCC IPO, as Janette noted in her note on Friday, which tightened liquidity and pushed out of this range. Us in research, we tend to believe this part of a gradual loosening agenda (as we laid out in the first section of the TRI, attached), and that the PBoC could have dealt with the IPO with a short-term injection, rather than a permanent RRR cut. As the data gets worse, we tend to think that in Q2 PBoC will be looking for lower inter-bank rates. Weak bank lending data rumoured for Feb may also have pushed them to cut