HONG KONG WEEKLY LIQUIDITY MONITOR:More easing expected

Summary of global fund flows.

    From 18 to 24 June, Chinese equity funds1 saw a net inflow of US$141m in contrast to an outflow of US$2.1b recorded theweek before. We attribute this to a US$574m net inflow into Chinese equity ETF funds.

    Hong Kong equity funds experienced a net outflow of US$117m, marking a second consecutive week of outflows, with HongKong equity ETF funds accounting for 40.7% of the total outflow.

    Elsewhere, developed markets, notably Developed Europe and Japan, received sizable inflows to their equity funds of US$3.9band US$3.2b respectively. US equity funds, however, suffered a sizable outflow of US$4.3b. As for the bond market, outflowswere recorded at bond funds in major economies led by Developed Europe, with a US$2.7b net outflow.

    China: PBoC injected liquidity into the market through OMO, cuts in RRR and interest rate.

    During the week ended 26 June and with the end of the second quarter approaching, Chineseinterbank repo rates continued to climb across all maturities. However, the increase was checked byRMB35b 7-day reverse repurchase operations launched by the PBoC in the open market lastThursday. The aim of these repos is to avert a cash squeeze towards quarter end. This is the firsttime in ten weeks that the PBoC has turned to open market operations as a means of injecting cashinto the market.

    On 27 June the PBoC announced cuts to both the RRR and interest rates, effective 28 June. RRR forcommercial banks serving rural areas, agriculture and small businesses will be cut by 50bp whileinterest rates for one-year lending and deposits will be cut by 25bp to 4.85% and 2.00%respectively. We expect RRR and interest rates to be lowered again in 2H15 as the PBoC tries toengineer a sustainable recovery in domestic demand.

    The State Council approved a draft amendment to the commercial banking law to scrap the loan-todepositratio (LDR) that limits bank loans to 75% of total deposits. We believe the relaxation ofLDR is positive to commercial banks, especially those that tend to have tighter balance sheets (suchas CMB, Minsheng, CITICS, CEB, Pudong, Industrial and Ping An), as it gives them greaterlatitude to manage their balance sheets. A more relaxed LDR also helps banks move non-standardassets (trust beneficiary rights, reverse repos, proprietary business, etc.) back to loan assets, whichenhances the transparency of bank balance sheets.

    HSBC’s China “flash” Manufacturing PMI came in above consensus, improving to a three-monthhigh of 49.6 in June. Breaking this down, we note the improvement in headline PMI was broadbased. The Output and New Order Sub-index rose from 48.4 and 49.1 in May to 50.0 and 50.3 inJune. However, with the recovery still in its early stages, the Employment Sub-index fell at a fasterrate in June.