The size of the PBoC balance sheet edged up Rmb58bn in July after expanding by Rmb655bn in June, mainly driven by the increase in PBoC’s relending to financial institutions on the asset side, and the rise of government deposits on the liability side:

On the asset side –

The PBoC’s FX purchase positions edged up Rmb10.8bn in July, confirming that there is no sizable FX outflow so far. The small gain in July following the Rmb7.6bn pick-up in June and marks around a1-year high. The rise in PBoC FX positions confirms our assessment that underlying FX flow remains largely stable and the PBoC’s intervention in the FX market was minimal, despite the notable acceleration in CNH/CNY depreciation in July.

The PBoC’s claims on other depository corporations increased Rmb128bn in July, after rising by Rmb626bn in June. The PBoC withdrew Rmb31.5bn via open market operations (OMO) and other relending instruments in July. The central bank may have increased its claims on financial institutions via other channels, such as deposits.

On the liability side –

Reserve money declined Rmb661bn in July, after increasing Rmb1,398bn in June. The change may have been largely driven by the decline in excess reserve ratio, as it tends to rise in June and fall in July, led by the seasonal changes in government deposits.

Government deposits rose by Rmb720bn in July on tax submission seasonality, after declining Rmb535bn in June. The increase was smaller than the +Rmb1.03trn jump last year, which helped the YoY money supply growth, but it still came in considerably higher than the historical average of July.

The money multiplier picked up to 5.70 in July from 5.56 in June, helped by the RRR cut that took effect on July 5 – a relatively broad-based 50bp RRR cut released liquidity that could total Rmb700bn (Rmb500bn for debt-to-equity swap & Rmb200bn to replenish SME credit supply).

The “M2 Proxy” growth edged down further to 10.3% YoY in July from 10.4% YoY in June, mainly driven by the decelerated adjusted TSF growth (M2 Proxy = Adjusted TSF + FX positions – fiscal deposits). On the sequential, seasonally adjusted basis, M2 proxy growth recovered to 12.0% MoM annualized in July from 7.7% in June.

There is further room for fiscal deposit dispersion and RRR cuts to boost money supply growth. The changes to the PBoC balance sheet and the recovery in multiplier indicate the central banks’ effort in supporting money supply growth by cutting the reserve requirement ratio. Going forward, there is more room to cut the RRR, e.g. the PBoC has hinted in their 2Q Monetary Policy Report that instead of base money expansion, RRR cut may be used as an alternative and potentially superior method for liquidity provision. It is also worth noting that although YoY fiscal deposit growth has slowed somewhat in July, there is still room for fiscal deposit to decline and for the broader fiscal policy to loosen, in order to help boost monetary expansion and stabilize end demand growth.