Last week’s interest rate cut by China’s Central Bank, the third of its kind since last November, sent Asian stocks soaring and reassured investors that the Chinese authorities are concerned about the rate of growth of Asia’s largest economy.
Economists forecast a 7% growth rate for China this year, a figure that’s much lower than in previous years, but still far better than many other economies around the world. That’s why investors, despite having some concerns about the Chinese economy and market in the short- and medium-term, are bullish on China in the longer-term. Here are some of the trends they see, both current and future:
Rajeev De Mello, head of Asian fixed income, Schroders:
“China is in the process of reforming its financial sector at a very rapid pace. As the rate cut was announced, banks were given more leeway to compete on deposit rates, which will bring more deposits back into the banking system from the less regulated non-banks. A deposit insurance was also introduced to help smaller banks that are more exposed to outflows during periods of uncertainty. China is also addressing the imbalance between central and local government financing.
Reforms are often not popular and can slow growth in the short-term. However, correct reforms will lead to higher, longer-term growth, which should be positive for investments. And longer-term economic drivers include China’s huge internal market; a significant manufacturing experience that can be developed further and efforts by Chinese companies to move into higher value sectors and de-emphasize shoes, clothing and cheap plastics.
In the short term, actively easing monetary policy should be positive for government bonds. Over the past year, Chinese onshore bonds, which are the world 3rd largest bond market, have returned 8.4% (in local currency terms) which is the second highest return after India (14.4%). We also believe that the Chinese currency will remain stable against the US dollar during this year.” Edmund Harriss, portfolio manager, Guinness Atkinson Asset Management: “China’s policy to shift toward consumption is slower, but will lead to more profitable and sustainable growth, and slower growth under the new model is better for investors, better for everybody.
Over the next 15 to 20 years, China also plans to increase outbound investment and improve trade links, to engage more fully with the international financial system through the internationalization of its currency. Interest rates are below the nominal economic growth rate and, to be consistent with stated policy, the Peoples Bank of China probably feels rates are low enough.