In the past, Chinese stimulus has helped reflate the world, and 2009 and 2015-16 were prime examples of this ‘big bang’ approach by Chinese policymakers.
In the past, Chinese stimulus has helped reflate the world, and 2009 and 2015-16 were prime examples of this ‘big bang’ approach by Chinese policymakers.
But are things different this time around?
What we are seeing now is a much more targeted approach.
The cumulative effect is therefore closer to what developed market central banks would consider a conventional rate cut.This leaves us more positive on the outlook for China, but the rest of emerging Asia, and indeed the world, will not be riding China’s coattails.
The latest evidence of this small-scale easing came in early November, when the People’s Bank of China cut the medium-term lending facility, a key policy rate, for the first time since early 2016.
While only a reduction of 0.05 per cent, it occurred on the back of a number of similarly small cuts to its new benchmark lending prime rate.
The cumulative effect is therefore closer to what developed market central banks would consider a conventional rate cut.
While this series of small cuts is unusual during a period of rising consumer price inflation, much of this figure is a temporary effect from swine flu on pork prices, and core inflation is around 1.5 per cent, or about half of CPI.
This time last year, China was slowing meaningfully.
While this slowdown coincided with the onset of the trade dispute with the US, the primary driver was the Chinese deleveraging campaign.
Myriad policies were enacted in 2016 and 2017, including money market rate hikes to deter borrowing, crackdowns on wealth management products, and action against the shadow banking sector.
Chinese financial markets felt the pain through an equity market sell-off and a spike in bond yields, despite global financial markets enjoying a strong run over the same period, and economic growth was restrained.
But we have seen somewhat of a turnaround in policy and the backdrop for Chinese growth and markets in 2019.
With the deleveraging campaign having largely met its aims by early 2019, policymakers have again shifted to measured stimulus.
The nature of the stimulus is different from the past, however.
The US-China trade dispute has led to some deterioration in employment, primarily in the manufacturing sector.
With overall employment levels a key pressure point for China, policymakers have focused on improving liquidity flow to small and medium-sized enterprises and private companies, which are the biggest contributors to employment.
This has taken the form of reserve requirement ratio cuts and reform of the loan prime rate mechanism – both intended to lower borrowing costs for corporates.
In this sense, we see the primary beneficiaries being Chinese asset classes, for instance the domestic-focused A-share equity market, Chinese government bonds and Chinese high-yield bonds.
While this stimulus may result in better sentiment for the rest of Asia, it is not of the magnitude where it will improve fundamentals for the region.
Instead, what is helping drive fundamentals for the rest of Asia is global central bank doveishness and the US Federal Reserve’s easing of dollar liquidity.
Along with low inflation in Asia, this has allowed central banks in the region to ease policy themselves, and we see this accommodative stance persisting in the near to medium term.
This should help stimulate credit growth and extend the lending cycle.
China, of course, has the ability to act, but we are seeing a more measured willingness to act.
While the frenetic pace of Chinese growth may have moderated, and with it the ability to support the rest of the world, we still see Chinese markets offering plenty of attractive opportunities for investors.
George Efstathopoulos is multi-asset portfolio manager at Fidelity International
