China’s central bank flexes its monetary policy tools
China announced several measures to release long-term liquidity into the financial system to bolster the economy. These include¹:
- On April 15, the People’s Bank of China (PBoC) reduced the reserve requirement ratio (RRR) for most banks by 25 basis points (bps), and by 50bps for smaller lenders, effective April 25.
- The central bank left one-year policy interest rates unchanged, disappointing most economists who had predicted a cut.²
- According to the PBoC, the RRR change will unleash about RMB530 billion (US$83 billion) of long-term liquidity into the economy. The PBoC last reduced the ratio in December 2021.
Measures to support economic growth
China’s corporates and small and medium enterprises may benefit from the central bank’s 23 additional measures, which are aimed at supporting the economy. Some key highlights include³:
- Banks are urged to expand lending to people with flexible employment (e.g., taxi drivers, online shop owners, and truck drivers) and provide longer-term and cheaper loans to small businesses.
- The PBoC vowed to extend or establish relending programs that provide funds for banks to lend to sectors that were hit by the pandemic. Such relending programs are expected to represent approximately RMB1 trillion (US$157 billion) in additional bank loans.
- Local authorities are being called on to set appropriate minimum down payment requirements and mortgage rates based on each city’s conditions, and banks are encouraged to support reasonable financing needs of property developers and construction companies.
- Policy banks are asked to step up their financing to major investment projects, while commercial banks are expected to be more proactive in lending to infrastructure projects and purchase local government bonds to support advanced construction.
- A transfer of RMB600 billion (US$94.2 billion) of profit was made to the central government in mid-April, which will be mainly used for tax rebates and transfer payments to local governments. This profit transfer has increased the base money supply in the country and is equivalent to a 25bps cut in RRR, according to the PBoC.
Separately, the China Banking and Insurance Regulatory Commission vowed to increase financial resources for logistics, transportation, and courier industries and use the relending funds to lower financing costs. It will provide funding support to smaller businesses that are suffering from temporary difficulties due to COVID-19.
The implications of China’s newly announced measures
While some market participants expected a bold reduction in interest rates, we believe China has adequate policy tools other than a rate cut to support growth if needed.
Despite a near-term dampening of investor sentiment, we believe these recent measures prove that China is determined to support the local economy:
- China continues to strike a balance between epidemic control and economic development. On Monday, April 18, Chinese Vice Premier Liu underlined efforts to stabilize supply and industrial chains. Shanghai’s city authorities have asked 666 local and foreign companies, mainly in the automobile, semiconductor, and energy industries, to resume production amid the city’s lockdown.
- We expect more targeted fiscal stimulus to be announced in the third or fourth quarter of 2022, which will likely underpin further economic growth.
- Although more than 60 non-tier 1 cities have already rolled out relaxation measures, additional housing-related policies may be unveiled. Many cities have introduced more favorable mortgage costs or down payment requirements, while more tier 2-cities such as Quzhou, Dalian, Suzhou, and Nanjing have relaxed home purchase and/or resale restrictions.⁴
- China is pushing ahead with its mRNA vaccine development, which should help fight the spread of Omicron or other COVID-19 variants down the road. For example, the country’s health authorities have recently approved the trials of two mRNA vaccines.⁵
Structural growth opportunities in China and Hong Kong equities
While we remain selective, we see opportunities in sectors and key themes in China and Hong Kong equities that should benefit from China’s structural growth story. These opportunities include:
- Exposure to both domestic Hong Kong equities with attractive dividends while also tapping into growth areas
- Potential beneficiaries in the consumption sector (e.g., companies with the ability to pass on cost inflation
- The materials sector, which could potentially benefit from a boost in infrastructure investment
- In general, we continue to favor sectors and investment themes that are likely to benefit from China's 14th five-year plan. These could include consumption upgrades, research and development, innovation, renewable energy and energy transition, as well as new infrastructure.
China stands ready for further policy measures
Overall, we believe China's ready to act and is likely to ease policy further should a sharper economic slowdown occur. In addition, China could turn to fiscal policy to boost growth (such as further spending on investments and infrastructure) as well as tax refunds and cuts. While near-term market sentiment has been mixed, we view the latest measures as signs that China is on track to maintain its economic course.
1 Bloomberg, as of April 19, 2022. 2 “Analysts see less room for China rate cut after ‘conservative’ RRR cut,” Reuters, April 18, 2022. 3 “These Are the 23 Measures China Just Unveiled To Save the Economy,” Bloomberg, April 19, 2022. 4 “Chinese cities ease home purchase down-payments to reignite demand,” Reuters, February 18, 2022. 5 “China approves CSPC, CanSino mRNA vaccines for clinical trial, boosting country’s arsenal against raging Omicron outbreak,” South China Morning Post, April 4, 2022.
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