China's rates to go down if more easing happens

Easing can help buoy the stock market.

The Shanghai Composite Index slumped 13.3% during mid-June, marking the fastest decline since June 2008.

According to a research note from CCB International, however, it does not view this as the end to a bullish stock market.

It anticipates further monetary easing by the end of June, which would relieve some downward pressure on the stock market.

Here's more from CCB International:

During the week ended 19 June, with the end of the second quarter looming, Chinese interbank repo rates climbed across maturities.

The 7D rate rose 62bp and came close to its level prior to the last RRR cut of 100bp. This took place as the PBoC stood by, resisting a short-term liquidity injection through open market operations for the seventh consecutive week.

Climbing financing costs were also seen at the long-end, in particular yields on mid-term notes and expected return on wealth management products.

In our view, the upsurge in short-term repo rates will exert pressure on the PBoC to conduct interbank liquidity injections through open market operations in order to alleviate a potential cash crunch towards quarter-end.

However, should the surge sustain beyond June, a RRR cut could be triggered moving into the third quarter. We anticipate paced RRR cuts in 2H15F, with a 50bp cut in each quarter.

We look for further easing, especially in the form of lower rates at the long-end, to foster a sustainable economic recovery.

We expect another interest rate cut of 25bp by the end of June along with liquidity injections with longer maturities of around three years and lower rates.

The current financing rate through Pledged Supplementary Lending (PSL) is 3.1% with maturities varying from three-to-five years, while the one-year lending rate at commercial banks is 5.1%.

Were an RRR cut to be implemented earlier than we expect (i.e. before the third quarter), it would likely delay the timing of an interest rate cut to the third quarter this year.

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