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Investing in Asia – February 2016Central bankers bid to stimulate growth
The decisions of central bankers in the US, UK, Europe and Japan are well documented, with most having pursued accommodative monetary policy following the financial crisis.
But while investors tend to hang on to every word of the US Federal Reserve, the Bank of England and the European Central Bank, less attention has been paid to Asian central banks’ ability to move global markets.
That was until last August when Chinese policymakers introduced a ‘one-off’ 1.9 per cent devaluation of the renminbi. Since then all eyes have been on the currency, but the intentions of the People’s Bank of China have confused some.
“Part of the difficulty with Chinese policymakers has been that both they and the financial markets are still learning how to communicate with each other,” says Ayesha Akbar, portfolio manager at Fidelity Solutions.
“While there is a cottage industry devoted to Fed commentary, there has been comparatively little need for Chinese policymakers to communicate their intentions and policies prior to now. Feeding into this, [China] is transitioning into an economy in which it has less control and in which markets play a more significant role.”
Ms Akbar acknowledges the People’s Bank of China has tried to improve the communication of its policy to markets in recent months, however. China has also been the most aggressive at reducing its deposit rate.
| JAPAN’S STIMULUS STRATEGY |
| On January 29 the Bank of Japan (BoJ) surprised markets when a narrow majority voted in a negative interest rate, with the central bank saying it will “cut the interest rate further into negative territory if judged necessary”. So what impact will the -0.1 per cent interest rate have? Nick Peters, portfolio manager at Fidelity Solutions: “The BoJ’s adoption of negative interest rates is likely to be a positive move for the economy, particularly with the care they took to offset the negative impact for banks. What they are essentially trying to do is to flatten the marginal yield curve for the economy, but ensure that the weight of the yield curve which banks are exposed to remains relatively steep. This should boost the economy while limiting the damage to bank profits.” “The negative interest rates should result in three main benefits, some of which have already been achieved. First, government bond yields have been pushed down sharply across the curve, which should also help to reduce the premium on risky assets. Second, introducing such a bold policy acts as a signalling effect to show the BoJ’s commitment to price stability. Third, negative interest rates should eventually drive down the yen’s value. Although the currency depreciated initially following the BoJ’s announcement, it has since appreciated as the market began to price out Fed rate hikes.” “One clear-cut effect of negative interest rates is the signalling device. By imposing negative interest rates – like the Bank of Japan did in January – a central bank signals to the market that it is willing to go far in order to increase monetary accommodation. In Japan, for instance, recent monetary policy measures have led to a flattening of yields on the middle and long-term maturity spectrum.” |
Asian central banks have also been deploying short-dated instruments to deal with more temporary liquidity risks, says Peter Sengelmann, senior portfolio manager, emerging market and Asian debt at NN Investment Partners.
“Apart from using these more conventional tools, central banks like the People’s Bank of China have developed new tools – such as the standing lending facility, which allows commercial banks to borrow from the central bank for one to three months, and short-term liquidity operations, which lets banks borrow funds for one to three days in times of extreme liquidity stress,” Mr Sengelmann says.
“Some other Asian countries have also been adopting unconventional domestic stimulus measures that we could see more of in 2016,” says Rob Marshall-Lee, head of Asia and emerging markets at Newton Investment Management.
“In Thailand, for example, the government has created a package to offer cheap loans to farmers and small- and medium-sized enterprises.”
It seems likely that alternative ways to generate income will continue to attract plenty of interest Peter SengelmannReserve Bank of India (RBI) governor Raghuram Rajan, who took over in 2013, has stuck to a more conventional approach to monetary policy, which is widely regarded a success. The bank cut the benchmark interest rate to 6.75 per cent from 8 per cent at the start of last year, while consumer price inflation is down from 11.5 per cent to 5.7 per cent over two years.
“Unlike the central banks of the developed world, the RBI has not used any of the unconventional measures like quantitative easing,” notes Ajay Argal, head of Indian equities at Baring Asset Management. “The objective of the RBI is to provide ample liquidity at all times. It is also of the view that to stimulate the economy, the government needs to ease the procedural bottlenecks, especially in the infrastructure areas.
“The RBI believes it can continue to stimulate in the conventional way of cutting interest rates as and when inflation comes down, as it has already demonstrated since the beginning of 2015.”
Mr Sengelmann observes monetary policy has worked to varying degrees in Asia. “For China, monetary policy easing is difficult amid accelerating capital outflows, but the government has managed to ease volatility with outright liquidity injections,” he explains.
“Monetary policy has also been relatively effective in both India and Indonesia, where prudent policymaking has helped to narrow macro imbalances and restore confidence.
“Elsewhere in South Korea, Malaysia and Thailand, growth has not shown signs of recovery. The reason that policies are not as effective in boosting growth as they may have once been is that the money multiplier is not as strong as it used to be.”
Mr Sengelmann adds: “In Asia, households are highly leveraged, credit conditions are tighter, the investment outlook is not robust… and so the demand for capital is not as strong as it used to be. Without lower rates perhaps the situation would be worse.”
Ellie Duncan is deputy features editor at Investment Adviser
