PBoC likely to cut the policy rate by 25bps in Q1 2016

China's M2 for the year 2015 grew by 13.3 percent Y/Y, up from 12.2 percent in 2014, suggesting an accommodative monetary policy bias. Even though the new loans were lower than expected at CNY 597.8 bn in December, the December aggregate financing was strong at CNY 1.82trn, up from November's CNY 1.02trn.

Aggregate financing was boosted by corporate financing via bond and stock markets. Due to credit concerns over the SMEs, the commercial banks have less incentive to provide loans to corporate. Hence they seek to the capital markets to finance the corporate. This gives a clue for the ongoing change in China's financing system.

"We think that the monetary policy will remain accommodative in the coming year. While further cuts in policy rates seems inevitable, China's central bank needs to take into account the risk of capital outflows which could be triggered by narrowing rate differentials between CNY and USD. We thus think PBoC will not cut the policy rates as aggressively as they did last year. We maintain our forecast that the central bank will cut the policy rate only by 25bps in Q1, but lower the RRR by 150-200bps for the whole year of 2016." - Commerzbank