The People’s Bank of China’s move to cut rates is a much-needed boost to investor sentiment — at least in the short term — but more stimulus is required to inspire confidence in the long term, asset managers said.
In a joint press conference on Sept. 24 between the PBOC, the China Securities Regulatory Commission and the National Financial Regulatory Administration, China unveiled a slew of stimulus, including the reduction of the seven-day reverse repurchasing rate to 1.5% from 1.7% and the reserve requirement ratio to 9.5% from 10%.
“The 50bps cut in RRR will unleash around 1 trillion yuan (in) long-term liquidity into the banking system; while the 20bps cut in benchmark 7-day reverse repo rate would lower the funding costs incrementally,” Peiqian Liu, Singapore-based Asia economist of the $862 billion Fidelity International, said in written commentary.
The PBOC also announced measures to bolster the property sector including cutting the existing mortgage rate by 50 basis points and reducing the downpayment ratio on second homes to 15% from 25%.
Money managers agreed that the moves could increase liquidity in the market by the trillions and that the announcements signalled a more aggressive easing positioning, which was welcomed by investors.
“The sense of urgency may convince investors that more policy support is on its way. Also, the decision of announcing multiple stimulus measures in one go, rather than spacing them out, should provide a stronger signal to the market,” Chaoping Zhu, Shanghai-based global market strategist at the $3.3 trillion J.P. Morgan Asset Management, said in a commentary.
“During the press conference, the PBOC governor mentioned that the central bank is ready to transact central government bonds in the secondary market. This may foster stronger policy coordination between the central bank and the Ministry of Finance to boost market liquidity in the next stage,” he said.
The CSI 300 closed 4.33% higher than the day before, while the Hang Seng Index rose 4.13%.
PBOC Governor Pan Gongsheng also said that more rate cuts could come in the future if necessary, which was a direct assurance that more stimulus could come, the fund managers said.
“We welcome the clear communication on monetary policy and expect China to continue with further easing, especially after many central banks in developed markets have started their own easing cycles, which gives the PBOC more room to do the same while still maintaining exchange rate stability in the medium term," Liu said.
David Chao, global market strategist for Asia-Pacific (ex-Japan) at Invesco, which managed $1.75 trillion in assets as of Aug. 31, is hopeful of fiscal support and "significantly more stimulus" on the supply and demand side, which he said is required to related economy.
Fiscal support could help drive a turnaround, and he expects government spending to pick up in the next few months, he wrote.
“I believe that this may be a good time to revisit Chinese stocks. The dividend yield for Chinese stocks is higher than the government bond yields, with the spread at the widest it has been for a long time,” he said in a commentary. “I believe that investors may pick up Chinese shares at these levels, in front of the stabilization fund that was recently announced and more government support.”
