China has tightened its monetary policy very modestly to curtail the growth of corporate leverage and more effectively price risk in money markets. Growth is unlikely to be impacted; it is sliding from 6.8% last year to 6.5% as stimulus abates. Similarly, the renminbi will continue to depreciate above 7.00 to the US dollar. For fixed income markets, long-dated onshore bond yields will rise and require investors to be selective in their exposure. Offshore issuance should increase as international rates are lower. In equities, higher yields and spreads make insurance and banks the beneficiaries. Infrastructure, property and consumer finance appear to be the sectors most at risk of a setback.
- On Friday 3 February 2017 the Peoples’ Bank of China (PBoC) increased moneymarket interest rates for the first time in many years. This was aimed at moving administered interest rates closer to market-based rates without changing the benchmark lending rate. The era of rate cuts is at – or very close to – an end. China’s policy bias is no longer towards easing.
- The impact will not slow the descent in GDP growth from 6.8% last year to 6.5% in 2017. Stimulation, if desired, could come from increases in funding available for banks to lend. Beijing will probably continue to allow USDCNH to rise (expected to breach 7.00). Beijing can also be expected to tighten rules on moving funds offshore ahead of the ruling party’s conference in the autumn.
- These changes will introduce some opportunities for investors. Local currency bond yields will rise at longer maturities and possibly prompt more USD-denominated bond issuance. In equities, monetary tightening is bad for infrastructure but good for life insurance companies and the net interest margins of large state banks.
Group CIO and Co-CEO Asset Management
CIO Private Banking
Chief Economist, Asia