InvestmentsApr 29 2015

More China policy loosening likely

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More China policy loosening likely

Looser Chinese economic policy has been predicted by experts after the country surprised markets with a greater-than-expected cut to a key policy lever.

The People’s Bank of China (PBOC) cut the reserve requirement ratio by 100 basis points earlier this month – double the 50bps that had been expected.

The ratio is the amount of capital banks must hold against their liabilities, such as loans. The higher the ratio, the more constrained the banks are to lend and vice versa.

A cut of this magnitude had not been seen since 2008, with more recent cuts coming in at 25bps and 50bps.

Asia fund managers and economists who cover the region have said they expect further action as the cut is likely to be a reaction to relatively weak economic data.

Amy Leung, a member of the Newton Asia portfolio management team, said: “The magnitude of this reserve requirement ratio cut, and the timing of it, is a reflection of the deteriorating economic data in the country”.

The £4.9bn Newton Asia Income fund has little exposure to the country, holding just 4 per cent at the end of March, according to the fund’s factsheet.

But the larger-than-expected cut has not persuaded the team to buy more of the country’s stocks.

“This latest cut will no doubt improve liquidity in the short term, but we think the authorities need to do more to address the root causes of China’s difficulties,” she said.

She added while Newton was comfortable with its underweight in China, it may act if the market fell to more attractive levels.

Craig Botham, emerging markets economist at Schroders, said the cut signalled “growth concerns after a weak first quarter” but it was “not to be read as Chinese quantitative easing”.

“Though we had forecast 100bps of cuts this year, our expectations had been for a pair of 50bps cuts rather than a single larger move,” he said.

He added: “While we do not subscribe to the view espoused in some quarters that growth was 3-4 per cent – based on the partial perspective of the economy provided by the Li Keqiang index – growth was likely weaker than reported and heading rapidly downhill.”

Mr Botham said he expected interest rate cuts “this quarter”, followed by “one more reserve requirement ratio cut around Q3, as the authorities continue to target growth stabilisation”.

Diamond Lee, manager of the Old Mutual Greater China fund, said the defensive moves of the PBOC made him wary of economically sensitive stocks in China, such as industrials and transportation.

“I’m waiting to see the outcome of the medicine – until that time I’m sticking to financials, which are a direct beneficiary of easing, and simple and direct stories,” Mr Lee said.

Financials were the largest chunk of the manager’s portfolio and made up 39.1 per cent at the end of February, the fund’s factsheet showed.

The reserve requirement ratio cut was not the only government intervention this month. On April 17, the China Securities Regulatory Commission (CSRC) encouraged short selling of businesses by expanding the list of securities eligible for short selling.

Mark Williams, the manager of the Liontrust Asia Income fund, said this announcement was “equally interesting” to the PBOC’s cut as it showed the Chinese government was trying to control the incredible rally in the A-share market.

This index has rocketed in the past year, especially so with the introduction of the Shanghai-Hong Kong Stock Connect, allowing foreign investors greater access to the market.