China needs to send a signal to the markets. The Shanghai Composite is down over 23% year-to-date while the Hang Seng is down 14.3%. China needs to ensure confidence in the market as global stock markets continue to slide. The PBOC is no stranger to announcing major policy decisions late in December and during illiquid times.
The People’s Bank of Chin has cut the Reserve Requirement Ratio (RRR) four times already this year (January, April, June and October). They also announced new funding tools in hopes to help economic growth from the restrictions on shadow banking. The targeted tools help policy transmission and avoids adding too much liquidity in the system.
Once we are past the holiday season, trade war negotiations will once again ramp up. We have seen progress between the US and China, but are nowhere near a final deal. This could be the perfect time for a calculated cut by the PBOC. If the PBOC cuts the RRR by 100bps, it would signal that they are going to do their part to prevent the economy from losing even more momentum.