Market Beats

Is there money to make if the PBOC loosens monetary policy?

MioTech Team 2019-01-23

In this report, we utilize AMI’s Event Driven Analysis tool to assess the historical impact of cuts to RRR in relation to the stock market.

As China grapples with a slowing economy and an escalating trade war with the U.S, the nation looks to slashing the Required Reserve Ratio, or RRR, in order to bolster the economy and boost growth. The first round of monetary policy easing was announced on the 4th of Jan, seeing the RRR drop by a full percentage point to release US$218 billion to the country’s banking system. The size of the cut was at the higher end of market expectations and would be the largest amount of net funds released in the past 5 cuts since January 2018. So far, the PBOC has lowered its RRR 16 times since 2007.

 


Source: Company Report
 

“A prudent monetary policy should be more focused on being neither too tight nor too loose,” the central bank said on Thursday. “[China] will make monetary policy more forward-looking, flexible and targeted.”

 

The strategic cut in the amount of cash banks have to hold as reserves also comes just before the highly celebrated Chinese New Year, to help stabilize volatile liquidity during the national holiday, whilst supporting targeted industries without providing too much capital to the market.

The size of the cut was at the higher end of market expectations and would be the largest amount of net funds released in the past 5 cuts since January 2018.

But will the loosening of China’s monetary policy stimulate the stock market? In 2018, China was the worst performing market among the major equity markets with approximately negative 30% return in the CSI300 Index. Instead of investigating into how loosening monetary policies have on real economic impacts like GDP, we decide to look at how the A-share market reacts to PBOC monetary policies.

 

Utilizing our platform, AMI’s Events Driven Analysis tool, we assess the historical impact of cuts to RRR in relation to the stock market.

 

Source: Company Report


If we look specifically at the CSI 300 index, our software charts out the past trading strategy from 2009 to 2018, plotting out the price in relation to the RRR announcements that took place year on year. According to our analysis, historically, the PBOC RRR cut raises the CSI300 trading volume at nearly 25% one-day after the announcement. The RRR announcements does boost the stock market trading volume but the most important question to ask is in exactly what direction.

 

AMI’s Events Analysis system generates quite an interesting result, different from the traditional perceptions, and also hints on how investors could improve their investment strategy. Find out if a shortest holding period trading strategy (sell at T+1) after the announcement of an RRR cut brings about positive or negative returns. Go one step further and discover how RRR hikes impacts trading strategies.

 

Download the report to get a full picture into stock market reactions after PBOC announcements on RRR adjustments simulated through different trading strategies.

Download the RRR Report

Get a free deep dive into the historical impacts of cuts to RRR in relation to the stock market.

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