Beijing Cuts RRR

Investor sentiment has received a welcome boost from China's central bank. The People's Bank of China has announced plans to lower the reserve ratio requirement by 50 bps from February 24, allowing banks in the country to increase lending, thereby boosting liquidity. However, Monday's meeting of Eurozone finance ministers will likely keep the market on its toes, where expectations are building for a resolution to talks about Greece's second bail-out package.

The move by the PBoC will bring the RRR to 20.5% for the largest Chinese banks, and is expected to free up around $64 billion for new lending. We see this cut as a sign that the balance of risks has shifted from controlling inflation to stimulating growth, given the bank still decided to cut despite January's spike in inflation. However, the spike in January was widely believed to be distorted by the holiday period, thus we don't take this a sign of bigger monetary easing. But we still expect slowing global economic conditions and the fear of a hard landing for the world's second largest economy to force the PBoC into loosening policy in coming months.

Eurozone finance ministers are scheduled to meet in Brussels Monday local time, which may decide the tone of risk sentiment for the week. Expectations are running high in led up to the meeting, with Germany's Finance Minister Schaeuble suggesting a decision would be made on the whole program and he back away from the idea of a piecemeal step-by-step approval process that could drag on for several weeks. However, some European officials have warned that a lot needs to be worked out before a full deal can be reached.

China and Japan have announced conditional plans to help combat the European debt crisis by adding more fund s to the IMF. However, both nations warned that the Eurozone would need to lift the current ESM EUR500 billion cap if it hoped to persuade other nations to increase their support. Currently, Eurozone nations have committed around USD200 billion, but the IMF's biggest partner, the US, has remained steadfast in its stance of not contributing additional funds.