Synopsis:

MUFG discusses the recent monetary policy adjustments by the People's Bank of China (PBoC) and the implications for the Chinese yuan (CNY) amid rising expectations for further easing to support economic growth.

Key Points:

1. Recent Rate Cuts:

   • The PBoC lowered the 14-day reverse repo rate by 10bps to 1.85%, following a similar cut to the 7-day reverse repo rate in July.
   • This adjustment is seen as a move to stabilize interbank liquidity rather than a signal of a new easing cycle.

2. Economic Context:

   • The Chinese economy is facing slowing growth and rising deflation risks, prompting expectations for additional easing measures before year-end.
   • Growth forecasts for China have been downgraded, complicating the government's goal of achieving around 5% growth for the year.

3. Impact of Fed Rate Cuts:

   • The Fed's recent 50bps rate cut has provided the PBoC with more flexibility to lower rates without exacerbating downward pressure on the renminbi.
   • The CNY has only weakened modestly after the recent rate cut, maintaining a stable position close to recent lows just above the 7.0500-level.

4. Upcoming Developments:

   • Market speculation about further stimulus has been heightened by an upcoming press conference with PBoC Governor Pan Gongsheng, who may announce additional support measures for economic development.

Conclusion:

While the PBoC's recent rate cuts are not indicative of a significant shift in policy direction, growing concerns about economic performance suggest that further easing measures are likely. The CNY's stability amidst these changes reflects the market's cautious optimism regarding potential stimulus to support growt