The People's Bank of China cut the reserve requirement ratio (RRR) by 50bps in February and by another 100bps in April, to tackle the liquidity shortage caused by large capital outflows. The RRR cuts have allowed commercial banks to deploy a larger share of their deposits for lending or other financing operations, and the money multiplier is likely to have increased in April.
In addition, a sizeable trade surplus is forecast in April - due to soft imports and import prices - which likely helped offset the impact of capital outflows. During the month, the government expressed itsdetermination to prevent currency devaluation on several occasions, which may have helped contain capital outflows. We forecast M2 growth to have risen to 11.9% in April, from 11.6% in March.
Credit outstanding likely expanded by c.14%. The growth of CNY credit outstanding quickened to around 14% in Q1, indicating that authorities allowed faster onbalance-sheet credit expansion to offset stricter regulation of off-balance-sheet activity.
Credit expansion in Q1 was consistent with the annual loan quota of about CNY 11.5tn. Based on the historical monthly distribution of the loan quota, Standard Charterd notes, "CNY new lending may have declined from CNY 1,180bn in March to CNY 906bn in April. While off-balance-sheet activity likely remained subdued in April, equity financing may have been robust, benefiting from the stock market rally.Aggregate financing increased CNY 1,208tn during the month, compared with CNY 1,182tn in March".
