1. Newsroom
  2. Fresh policy easing likely in China
Menu
Analisi 21.06.2019

Fresh policy easing likely in China

Fresh policy easing likely in China

With the increased trade war risk from additional tariffs on Chinese exports to the US, investors have been focusing on policy easing to assess both countries’ economic and earnings outlook.


The US Federal Funds future is currently pricing in multiple rate cuts one year forward. China, on the other hand, has basically kept the powder dry without another major leg-up in policy accommodation, having embarked on policy stimulus since last summer.

China’s credit numbers for May also confirmed the People Bank of China’s (PBOC’s) prudent stance. This is understandable because the data captured some brief liquidity normalisation before President Trump’s latest tariff imposition on Chinese exports on May 10 when many anticipated a trade deal was in the making.

PBOC has continued to stay prudent in the aftermath of Trump’s punitive measure despite increased argument that they have sufficient room for monetary expansion when needed if downside pressure looms.

May Credit Trends

May saw continued steady credit trends in Total Social Financing value (RMB1.4trn) and growth (up 10.6% year-on-year). New loans were stable compared to the same month last year, although shadow credits saw continued tight control.

A breakdown of the loan numbers reveals continued accelerating mortgage lending as well as a sharp rise in short-term corporate loans and bill financing but at the expense of medium- and long-term lending to companies.

It is a good sign for the latter as efforts to boost lending to small- and medium-sized enterprises (SMEs) and private firms have shown some results, mostly in short-term financing. Sluggish longer-term financing reflected overall weak corporate loan and capital expenditure demand in the economy.

New flow of shadow credits dipped markedly in May after a pickup two months prior. This was mainly due to deceleration in corporate bond issues and specialised bond issues for local infrastructure investment. 

Resumption of specialised bond issues is already underway given the government’s latest announcement; Beijing can’t afford to see further slippage in infrastructure growth (slowed to 1.6% year-on-year growth in May) should external drag intensify.

China Policy Easing Tailored To Risk

To recap, we still expect Beijing to increase policy easing and the scale of another round of stimulus will depend on the extent of downside risk induced by the still-developing trade war.

To offset a 1.5% cut in gross domestic product (GDP) caused by the scenario of 25% tariff on all Chinese exports, China will need to expand its multi-pronged policy stimulus.

We expect a further 100-150 basis points (bps) cut in the reserve requirement ratio (RRR), modest cut in lending rate, a ramp up of credit impulse growth to 10-15% yoy, further tax reduction and sector-specific liquidity allocation, and/or possibly 2%-5% depreciation of CNY/USD to help bear the policy burden (see Asia Macro Strategy – China Market Outlook Amid Policy Easing, May 21, 2019).

We believe that the just released weak set of economic data for May (activity data such as industrial production and fixed asset investment have decelerated noticeably despite firm retail sales growth) has significantly increased the likelihood of a more proactive response from Beijing.

Look out for the maturity of a massive (RMB690bn) Medium-Term Lending Facility (MLF) in July. This is likely to be offset by a 50bps cut in RRR by the PBOC to prevent too much liquidity withdrawal in the banking system. If this occurs, this will be the first signal of China’s renewed round of policy support, which should help lift market sentiment for Chinese earnings growth in equities and support current tightness in China’s USD credit spread.

Read the Full Document with Charts

CHAN-Anthony_150x150.jpg

Anthony Chan
Chief Asia Investment Strategist

Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Le news più lette

Analisi 01.10.2020

COVID-19: UBP vi terrà aggiornati

Dalla comparsa del coronavirus, UBP accompagna e sostiene i suoi clienti nel contesto inedito di questa crisi sanitaria mondiale. La Banca vi aggiorna regolarmente sull’adeguamento dei suoi piani alle regole precauzionali fissate dalle autorità e condivide con voi le più aggiornate analisi dei suoi esperti sulle conseguenze della pandemia per l’economia mondiale e i mercati finanziari.

Analisi 30.06.2020

Aggiornamento delle prospettive di investimento per il 2020

L’economia globale al bivio

Analisi 24.06.2020

Market turmoil brings new opportunities for pragmatic investors

March 2020 was difficult time for many investors, as COVID-19 spread across Europe and the US, leading to sharp sell-offs in fixed-income credit markets. While such market turbulence is not to be welcomed, its occurrence can create opportunities.


Altro da leggere

Analisi 21.11.2020

UBP Investment Outlook 2021

Il mondo nuovo
Analisi 09.11.2020

Will Chinese domestic consumers become the next global growth engine ?

China revealed the key themes of its upcoming 14th Five-Year Plan (14-FYP) and long-range objectives through the year 2035. The Fifth Plenum took place amid signs of stronger economic recovery, with better performance spilling over onto the domestic sector.
Analisi 02.11.2020

Hidden gems in Swiss & European small caps

Small and mid caps have traditionally recorded higher growth rates and investment returns over the long term than large caps: it is easier to generate a dynamic growth rate from a smaller base. Swiss and European small and medium-sized capitalisations – so-called ‘SMID caps’ – also tend to provide investors with ‘pure play’ exposure to major secular growth trends.