PBOC moves with aggressive easing, may not be enough

On Sunday, Chinese central bank Peoples Bank of China (PBOC) reduced Reserve requirement ratio (RRR) by 100 basis points to 18.5% on Sunday.

Reserve requirement Ratio is defined as portion of the deposits that the banks need to maintain with central bank, which is not available for loans or investments.

With weekend move PBOC indicated follow the path of aggressive easing for now

• Country's central bank's Sunday move overwhelmed market participants and economists who were expecting a cut not more than 50 basis points.
   
• From November 2014, in last six months PBOC this is the fourth time PBOC has eased policy. Two interest rate cut and 2 RRR cut were delivered to reign on weaker growth and inflation.

However the PBOC might have started late, as Chinese economy is in retreat for quite some time now.

• Latest release this month showed, China's trade balance weakened to just $3 billion, whereas growth for first quarter dropped to 7%.

• Release of weekend survey of housing market shows, average prices dropped 6.1% y/y in March, with new house prices declining in 49 cities out of 70 surveyed.

Real estate is vital for Chinese economy.

• Real estate in China accounts for about 15% of overall economic activity. It supports 40 industries like Cements, building materials, furniture, durable consumer goods etc.

Latest move may not enough to reverse the course of economic decline and market seems confused about this liquidity injection.

• While liquidity injection was cheered with index moving to new high of 4356, however concerns over desperate actions by PBOC led to drop of 1.64% to 4217 to the closing.