The PBOC cuts the 7-day reverse repo rate by 10bps to 1.9% from 2.0% ahead of the announcement of the benchmark 1Y MLF rate this Thu (15 Jun). The 7-day reverse repo rate and 1Y MLF rate were last cut by 10bps in Aug 2022.

With the move today, the 1Y MLF and the 1Y loan prime rate (LPR) rates are expected to see a corresponding reduction to 2.65% on 15 Jun and 3.55% on 20 Jun, respectively. The 5Y LPR may see a larger cut than 10bps to increase support to the property market.

For the rest of the year, we do not anticipate additional interest rate cuts after the 10bps in Jun unless economic conditions continue to worsen. Nonetheless, we maintain our forecast for a 25bps reduction in banks’ reserve requirement ratio (RRR) in 2H23 to release more long-term funding into the banking system. This may be used to partly replace the CNY2.9 tn of 1Y MLF maturing in 2H23

Market is also anticipating the strengthening of property support measures as indicated by the officials earlier this month. 

We maintain our growth forecast for China at 5.6% in 2023 with 2Q23 at 7.8% y/y (1Q23: 4.5%) against the low base during Shanghai’s two-month Covid-19 lockdown in 2Q22.

We are of the view that a rebound in the CNY will likely start in 4Q23 when China’s economic recovery regains momentum. Our current set of USD/CNY forecasts are at 7.20 in 3Q23, 7.05 in 4Q23, 6.90 in 1Q24 and 6.80 in 2Q24.