Hello, this is Daily Stock, delivering sharp insights into global macro trends and commodity markets.
Summary
The People's Bank of China (PBOC) is deliberating on whether to use the card of an additional Reserve Requirement Ratio (RRR) cut, standing at a crossroads between economic stimulus and stabilizing the yuan.
Amid the 'tri-polar decoupling' where monetary policies of the US, Europe, and Asia move in different directions, the PBOC's choice is emerging as a critical variable that will shake up global liquidity and the dynamics of commodities like copper.
Market Overview
Currently, China's RRR stands at around 6.2%, and the Loan Prime Rate (LPR), a benchmark for market interest rates, has remained frozen for 14 consecutive months.
Chinese authorities are facing the shock of a sluggish 4.3% GDP growth rate in the second quarter, but they are extremely wary that a hasty RRR cut could trigger yuan weakness and rapid capital flight.
In particular, with the US Federal Reserve (Fed) still maintaining its high-interest-rate stance, the PBOC seems to be turning to targeted liquidity tools, such as supporting specific non-bank financial institutions, instead of a massive monetary injection.
[Image: /stdaily/uploads/202607/gen_6a665987b0e174.85449016.png]
Financial Analysis
A blanket RRR cut, a traditional quantitative easing tool, is a powerful financial buffer that supplies hundreds of billions of yuan in permanent liquidity to the market.
However, looking at the PBOC's recent balance sheet, it is taking a micro-adjustment approach to the interbank short-term liquidity ratio by adjusting net purchases of government bonds and Pledged Supplementary Lending (PSL).
While China's recently announced Broad Money (M2) supply has maintained an upward trend year-on-year, the transmission to domestic consumption is slow, resulting in a clear "slowdown in money velocity" where funds remain parked in bank deposits.
[Image: /stdaily/uploads/202607/gen_6a6659909a2618.05777617.png]
Valuation
While the US stock market sustains its strength driven by AI infrastructure demand despite overvaluation concerns, China's CSI 300 Index has reached historical bottoms, highlighting its price attractiveness.
Financial sector estimates suggest that if the RRR is cut by an additional 50 basis points, the lower discount rate effect could boost the Price-to-Earnings (PER) multiples of tech and financial stocks by about 3% to 5%.
However, compared to the relative valuation strength of European (DAX, FTSE) and other Asian indices, the rebound of Chinese equities is analyzed to be sustainable only when accompanied by structural fundamental improvements.
| Region/Country | Major Index (Intraday) | P/E Ratio (PER) Trend | Monetary Policy Position |
|---|---|---|---|
| **US** | NASDAQ 24,975.82 | Relatively overvalued (AI-led) | Extended high rates & wait-and-see |
| **Europe** | Euro Stoxx 50 | Neutral level (sluggish manufacturing) | Gradual rate cuts & pause |
| **China** | Shanghai Composite | Historically undervalued (PBR below 1x) | Micro-adjustments under accommodative stance |
| **South Korea** | KOSPI 6,690.62 | Exposed to geopolitical & export volatility | Timing interest rate cuts |
Expert & Institutional Analysis
Major global investment banks, including Goldman Sachs, are cautiously revising their forecasts, predicting that the PBOC will hold off on a sudden, blanket RRR cut in Q3 and instead play that card later in the second half or towards the end of the year.
Overseas analysts diagnose that "broad easing measures have been pushed back because the PBOC's top priority has temporarily shifted to defending the yuan's exchange rate."
On the other hand, commodity research institutions evaluate that physical demand for materials like copper (around $12,424 per ton on LME 3M) is building a solid floor, supported by China's indirect liquidity supply and continuous power grid infrastructure investment.
[Image: /stdaily/uploads/202607/gen_6a66599b7bacf5.67816089.png]
Risk Factors
The biggest risk is a scenario where the US Fed's high-rate-for-longer stance persists, failing to narrow the US-China interest rate gap and causing a sharp depreciation of the yuan.
In addition, disruptions in the commodity supply chain due to geopolitical instability in the Middle East and increased volatility in international oil prices could stimulate import prices and disrupt China's internal reflation path.
Furthermore, the continuous contraction of domestic retail sales and sluggish real estate development investment in China could aggravate the "liquidity trap," preventing the monetary supply from permeating into the real economy.
Investment Perspective
A cut in China's RRR is a traditional positive catalyst that stimulates upward momentum for global commodity prices and promotes capital inflows into emerging market equities.
However, at this point, the market relies on targeted structural support rather than blanket easing. Thus, rather than expecting a sharp V-shaped rebound, investors need to monitor the market with a longer-term, "low in the first half, high in the second half" perspective.
Investors must engage in asset allocation under conditional circumstances, bearing in mind that this is a volatile market where Daily Stock's own Fear and Greed Index points to Extreme Fear (12.9) for the KOSPI and Fear (39.4) for the NASDAQ.
Investor Checklist Q&A
Q1. What is the direct impact of the PBOC's RRR cut on the South Korean stock market?
A1. When the lending capacity of Chinese commercial banks increases due to the RRR cut, expectations for earnings improvement in domestic IT, chemical, and machinery sectors, which have a high export reliance on China, will rise, acting as a positive factor for foreign capital inflows.
Q2. Why can't China immediately and significantly cut RRR and interest rates despite economic difficulties?
A2. If China aggressively cuts interest rates while the rate gap with the US remains wide, it could trigger a plunge in the yuan's value and rapid capital flight, which could conversely damage the asset markets.
Q3. If the RRR cut is delayed, will prices of commodities like copper or steel plunge?
A3. Price corrections may occur due to short-term demand slowdown concerns, but structural factors, such as copper supply shortages driven by power grids and AI data centers, remain robust, making them highly likely to maintain downward rigidity.
Q4. What is the "liquidity support tool for non-bank financial institutions" recently mentioned by the PBOC?
A4. It is a macroprudential system where the central bank directly provides liquidity using high-quality government bonds as collateral when securities companies, trust firms, etc., face liquidity crunches, preventing it from spreading into systemic risk.
Q5. How should investors approach investing in China-related stocks or ETFs at this point?
A5. As global monetary policy decoupling and sluggish domestic demand persist, a gradual dollar-cost averaging approach based on undervalued valuation attractiveness may be effective, rather than chasing temporary surges.