With the conclusion of the Two Sessions this week, China’s stock markets—both A-shares and the Hang Seng Index—have demonstrated resilience over the past two weeks. Although they have not exhibited a sharp rally, they have emerged as a safe haven for global capital amid a broader market downturn. On Friday, the A-share market surged past the 3,400-point mark, reflecting strong investor sentiment. Market speculation suggests that a reserve requirement ratio (RRR) cut could be imminent, and the likelihood appears high.
1. Favorable Conditions for an RRR Cut
China’s interest rates have been on an upward trajectory, with the 10-year government bond yield surpassing 1.80%. While February’s inflation data declined to -0.7% year-on-year, it has not offset the continued rise in bond yields. The People’s Bank of China (PBOC) has also been actively draining liquidity through open market operations, signaling a recovery in credit demand. From the perspective of yield curve control, conditions for an RRR cut are now well-aligned.
2. Expanding Government Bond Issuance
Since the beginning of the year, local government bond issuance has been accelerating. Additionally, fiscal funds approved during the Two Sessions will be gradually disbursed, increasing future bond supply and further pushing up yields. To counteract this pressure and ensure liquidity, the PBOC has a strong rationale for implementing an RRR cut. As the second quarter approaches, the impact of external tariffs will start to manifest from March to April, intensifying in Q2. A reserve requirement reduction would serve as a critical tool to hedge against external uncertainties.
3. Rising U.S. Recession Risks
Expectations of a U.S. economic downturn are mounting. February’s U.S. CPI data fell more than expected to 2.8%, but the impact of new tariffs will start materializing in March. Meanwhile, oil prices have limited room for further declines, and progress on reducing the U.S. fiscal deficit has been slow, raising the risk of persistent inflation. Should inflation expectations become entrenched, U.S. interest rates may face renewed pressure, potentially triggering a sharp equity market correction and elevating recession risks. Key factors influencing U.S. fiscal balance—including Trump’s proposed tariff hikes, domestic tax cuts, and the Debt Optimization and Growth Efficiency (DOGE) plan—are all fraught with uncertainty. This uncertainty has weakened the dollar, while Asian currency markets have shown strong performance, bolstering investor confidence in the region.
4. Strength of the Renminbi Supports an RRR Cut
With the renminbi remaining firm and domestic interest rates on the rise, room for an RRR cut has opened up. We anticipate an initial reduction of 50 basis points, releasing approximately 1 trillion yuan in liquidity. Considering the potential impact of U.S. tariffs, April would be a logical timing for the move. Furthermore, with 500 billion yuan allocated to strengthen major commercial banks’ capital positions, the scope for additional RRR cuts this year could expand further.