RRR cut fails to buoy market sentiment

But there's still good news.

The PBoC had earlier announced a RRR cut by 50bp, effective 5 February.

According to a research note from CCB International, it is now clear that the RRR cut has failed to buoy market sentiment.

In fact, the Shanghai Composite Index posted a daily loss of 1.0% on 5 February and a loss of 1.9% on 6 February.

The report noted, however, that the good news is that liquidity in China’s interbank market has improved, with the seven-day repo rate falling 22bp from its 4 February level.

Here's more from CCB International:

We anticipated the cut, which we believe was implemented to ease liquidity tightness amid capital outflows over several months and funding demand for frontloaded fixed-asset investments in 2015.

The bank will release deposits of around RMB650b according to our calculation.

Official statistics on balance of payments indicate capital outflows of US$152.2b in 4Q14 (including both securities and other investments), equivalent to a broad-based RRR hike of about 80bp.

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