China’s central bank PBoC announced on Sunday to cut the reserve requirement ratio (RRR) for some lenders by 1%, effective October 15. According to the bank’s statement, this will release a total of CNY 1.2T. Of which, CNY 0.45T will be used to repay existing medium-term funding (MLF) facilities which will mature on the same date. The cut will apply to large commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks and foreign banks.

PBoC said that objective of the RRR cut is to “optimize the liquidity structure and enhance the financial ability of financial services.” Release of CNY 750B of funds can “increase the financial institutions’ support for small and micro enterprises, private enterprises and innovative enterprises, promote the vitality and resilience of economic innovation, enhance the growth of endogenous economic growth, and promote the healthy development of the real economy.”

PBoC also maintained that despite the RRR cut, monetary policy is “stable and neutral” and the “orientation has not changed”. It added that the cut added liquidity but monetary policy is “not relaxed while market interest rate is stable. PBoC does not expect “depreciation pressure” on the Chines Yuan after the move.

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PBoC’s statement and Q&A in simplified Chinese.

Overall, to us, the central bank’s RRR cut is clearly a pre-emptive counter measures to the market volatility last week. That is, the steep decline in Asian equities as well as surge in global treasury yields, which China was on holiday for a whole week. It’s measures to stabilize the Chinese market when it’s back from holiday tomorrow. We’ll have too see the reactions in the Shanghai SSE and USD/CNH tomorrow to see how the cut is received by the markets.

Meanwhile, we will cancel the AUD/USD short strategy as noted in weekly report, and see how the markets react first.

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