On Friday China again cut banks reserve requirement ratios (RRR) by 100 basis points as it looks to soften the risk of a sharp slowdown. Although this was the first for 2019, the PBoC had already cut the RRR 4 times in 2018 as it battles with lower growth and mounting pressure from the US over tariffs. As it stands at the moment RRR for large banks is 14.5% with small banks at 12.5%. The reduced ratio will be made in 2 stages according to the PBoC, the first on 15th January, the second 10 days later, both in 2 equal amounts. The PBoC believes the cut will release over USD116bn into the financial system, plus ensuring an ample supply of cash ahead of the Spring Festival holidays.
As well as the PBoC cutting the RRR Premier Li Keqiang also announced that China will reduce taxes and fees aimed at supporting small private companies. ‘Keeping employment stable relies on numerous small and micro-sized enterprises, whose development requires the support of inclusive financing, a promising and beneficial cause’ Li remarked. He also wants larger state-owned banks to take the lead in offering considerate services to private and small and micro-sized enterprises, establishing inclusive financing brands, and boosting market vitality and the corporate sector's confidence. Li wants China to maintain a prudent and balanced monetary policy that is ‘neither too tight nor too loose’ whilst maintaining good market liquidity to enhance the greater economy, at the same time improving comprehensive regulation to anticipate financial risks.
And it looks like one of the first trades of the year seems to be in play. Long iron ore. This comes after Donald Trump said he will not move on his demand for a wall between the US and Mexico, however, he has said the barrier could be made of steel instead of concrete as a potential compromise with Democrats who are refusing to fund the project. The US is in its third week of the partial government shutdown that has left thousands of government workers without pay (Trump said he could ‘relate’ to those people who would have trouble paying bills because of the shutdown). Trump tweeted ‘We are now planning a Steel Barrier rather than concrete. It is both stronger & less obtrusive. Good solution, and made in the U.S.A.’
For those of you that are interested, the price for the benchmark 62% traded above USD73 a tonne on Friday, above the 2018 year high, and up nearly 18% from the November ’18 lows.