China steps up support, trade talks coming up

PBoC cuts policy rates and bank RRRs …

As expected, the Chinese authorities are stepping up support to offset the drags from the escalated trade conflict with the US. This morning, PBoC governor Pan Gonsheng announced a 10bp reduction of the 7-day reverse repo rate to 1.40% (effective per Thursday 8 May), as well as a 50bp reduction of banks’ reserve requirements ratio (RRR), to 9.0% (effective per 15 May). Pan also announced a 25bp reduction of policy rates on the PBoC’s structural relending instruments for commercial lenders, the so-called Pledged Supplementary Lending facility for policy banks, and the housing provident fund. The RRR for auto financial companies and leasing firms will be cut to 0%, from 5%. These measures are in line with our expectation of additional monetary easing in the form of policy rate and RRR cuts, combined with the further stepping up of fiscal support. We expect cuts in other policy rates (such as the loan prime rates, and the 1-year medium-term lending facility rate) to follow soon.

… and presents some targeted lending measures

Governor Pan also presented a couple of additional targeted lending measures. The quota for a technology-oriented relending facility to support the upgrading of consumer equipment was increased by CNY 300bn to CNY 800 bn. A special CNY 500bn relending facility will be set up to support the consumption of services and elderly care. A relending facility for agricultural firms and SMEs will be raised by CNY 300bn. The PBoC will also come with a new debt risk-sharing instrument, that will enable the central bank to provide cheap lending to support the buying of bonds issued by technology firms. Furthermore, it was announced that two special funds to support the stock markets will be combined, with a total quota of CNY 800 bn.

US-China trade talks to start soon

Another important development relates to the progress with US-China talks, following the sharp escalation in April, with bilateral tariffs skyrocketing (US on China: 145%, vice versa 125%). While the US, pressured by financial markets and corporate lobbying, had already exempted consumer electronics and car parts from these high country-specific tariffs, recently US officials were increasing their calls on Beijing to get to the negotiation table. Beijing initially played ‘hard to get’, but a more conciliatory tone was seen more recently, and today it was announced that talks on de-escalation between the two giants will be held this weekend in Switzerland. The US delegation will be led by Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer, while Vice Premier He Lifeng will lead the Chinese delegation. Although China has several reasons to play it tough (see our recent update, China: The Art of the No-Deal), we still think that both countries could benefit from de-escalation, given the big interests at stake and the fact that the trade war is damaging for both the US and Chinese economies.