EM ASIA CREDIT: Sunac China: May sales rebound

• Markets have agonized for some time as to when there would be new measures announced by authorities to support the Chinese economy in a bid to ensure the 5% GDP growth target is achievable in the face of 145% tariffs from the US.
• The Central Bank, the People’s Bank of China, announced today a cut to the seven-day reverse repurchase rate to 1.4% from 1.5%.  The reverse repo is the preferred measure for managing interbank liquidity by the PBOC. The PBOC conducts daily operations known as open market operations.  The change will come into effect from tomorrow.  
• The PBOC also announced a reduction in the amount banks must own in reserve (known as the RRR) by 0.5% which is expected to see CNY1tn of long term capital released into the market.
• The PBOC will set up a CNY500bn  relending tool for consumption and elderly care with more details to follow.
• The PBOC will increase its relending fund for technology companies by CNY300bn to support innovation.
• The PBOC will increase its relending fund by CNY300bn for agriculture to support the sector.  
• The measures could see upward pressure on yields as banks tend to put excess liquidity held for reserves into the bond market.  The PBOC had halted a bond buying program earlier this year as yields ratcheted lower and any upward movement in yields could see that the program restarted.
• The regional governments and central governments have enormous issuance requirements this year.  The first test post this announcement will come on Friday when the central government issues CNY71bn of 2055 and CNY170bn of 2026 bonds
• The CGB market and bond futures have reacted very little to the news with CGB 10yr unchanged at 1.62% and bond futures marginally higher.   The news of the RRR cut is not a sell order for banks so no mass liquidation of bonds is expected.   However over time it is likely to see selling pressure on yields, something the PBOC will likely seek to manage. 

Headlines have crossed that the PBoC will cut the RRR for banks, injecting 1trln yuan of fresh liquidity, while the 7 day repo rate would be cut by 10bps to 1.40%. PBoC Governor Pan stated this would lead to a 10bps reduction in LPRs. Other policy initiatives were also announced as part of efforts to step up macro policy adjustment. The stock market will be supported, with further encouragement in longer term funds, while policies will also be introduced to aid tariff hit firms. 

• China and Hong Kong equities opened up strongly on the news, albeit sit away from best levels. The HSI was last up around +1.5%, we did open up over 2%. The CSI 300 was last near +0.75%, after opening +1.4% firmer. Hong Kong's benchmark is back close to early April highs, while the CSI 300 is tracking similarly.
• In the FX space, the USD has been better supported, with USD/CNH up from earlier lows, last just under 7.2200, with the easing steps from the PBoC likely weighing at the margins. AUD/USD is back under 0.6500 and little changed for the session.
• In the metals space, iron ore is firmer, albeit within recent ranges (last near $98.50/ton), while copper is mixed.
• It comes after earlier morning headlines of US-China trade talks to be held in Switzerland later this week. The fact that fresh stimulus measures have been announced today may reflect China's view that any significant progress on trade with the US may take time to achieve and that the economy will need support.
• The stimulus measures follow the recent Politiburo meeting which focused on the economy, while the PMI surveys pointed to a weaker demand backdrop for Q2 (particularly on the external side). 

Q1 labour market data printed slightly better than the RBNZ projected in February but still in line with broad expectations. The unemployment rate was steady at 5.1%, while the RBNZ expected a 0.1pp increase, employment rose 0.1% q/q compared to a flat projection and private labour costs rose 0.4% q/q, which were 0.2pp below the RBNZ’s forecast. Westpac sees the implications for the RBNZ as “mixed”.

• Westpac observes that there has been “a marked drop in youth participation in particular in recent quarters, with the tougher jobs market seeing young people returning to or spending longer in study rather than actively looking for work.”
• “The small rise in employment was almost in line with the 0.2% rise in the working-age population (less than the 0.3% that we had assumed). A further drop in the labour force participation rate accounted for the remainder, leaving the unemployment rate unchanged.”
• “The public sector LCI rose by 0.9%, led by a collective pay agreement for teachers. On an annual basis, the private sector LCI slowed from 2.9% to 2.5%.”
• “The analytical unadjusted LCI, which includes pay increases that are related to higher productivity, rose by 0.7% for the private sector, the smallest quarterly rise since December 2020. Fewer roles have seen pay increases over the last year, and the average size of those increases has moderated.”