ICYMI, the People's Bank of China delivered a surprise stimulus yesterday, injecting funds:

RBC have been quick with an analysis, this in summary from their piece overnight:

High frequency data in China have disappointed in recent months

  • loss of momentum in activity emerging
  • tighter credit conditions
  • Some policy easing has already occurred with the likelihood that more will be delivered.

Chinese policy settings are moving in the opposite direction to the G7

Could it trigger some speculation that the RBA's next move will not be up given AU's leverage to China and higher beta?

  • We think it unlikely at this juncture given that PBOC action is in response to a moderation in activity/tighter credit conditions (rather than a sharp shock)
  • It may, however, keep the RBA on the sidelines for longer

We think the market has largely overlooked Chinese developments and is only beginning to focus on these dynamics prompted by a PBOC that failed to follow the Fed last week … likely to impact the AU market in two stages.

The first is currently underway and captured quickly by an A$ which is underperforming after proving remarkably stable and resilient for some time

  • Weaker activity data and the likelihood of Chinese policy action should also keep the RBA on hold for longer
  • We suspect this has further to run with Chinese developments still not in the forefront of the market's attention.

The second stage which is probably several months down the track is some reversal of this, all else being equal as policy action feeds through the economy and lends support

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RBC add:

  • As always, there is another scenario for China that is far more sinister and has far less benign implications regardless of timeframe. The build-up of financial risk amid opaque off balance sheet and circular lending between institutions remains the key threat to Chinese growth and stability. The risks are well known and acknowledged by the RBA but timing remains uncertain and almost impossible to forecast. It is likely to be this scenario that will underpin RBA rate cuts.