PBOC steps up policy support

Sunday’s cut to the required reserve ratio for China’s banks signals a stepping-up of policy support. The 100bp cut was double the usual size and the first move on this scale since late 2008. It is primarily a response to the weakness of recent data. Most of the activity and spending data for March came in below consensus. We suspect this was partly the result of lingering disruption from Chinese New Year. But downside risks to growth appear greater now than they did a month or two ago. Further RRR cuts are likely – perhaps another 150bp before the end of the year – along with at least one more cut to benchmark rates.