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Beginning of rate easing cycle in China

Added 5th December 2014

Recent interest rate cuts by Chinas central bank marks the beginning of a rate easing cycle, which will have positive implications for Chinese equities, writes Victoria Mio, chief investment officer and fund manager of Robeco Chinese Equities.

Beginning of rate easing cycle in China

According to Mio, however, this rate cut alone is unlikely to change the downward trend in growth. 

Further easing actions are necessary to boost investors’ confidence and stabilize the economic growth, which could then lead to an extended rally in both the onshore A shares and offshore China equity markets, she said.

“Policy makers have strong determination to lower the funding costs for the real economy. Therefore, we expect the PBOC will cut the reserve requirement ratio in the coming months to increase liquidity supply.”

“Moreover, we also expect the PBOC will cut the interest rate again if the market interest rates remain high. It will also inject liquidity through open market operation to solve short liquidity constraints during major holidays or quarter end.”

In a bid to support the economic growth, the People’s Bank of China in a surprise move cut the one-year benchmark deposit rate by 25 basis points to 2.75% and one-year benchmark lending rate by 40bps to 5.60% on 22 November.

Boost to rate sensitive sectors 

The current rate cut is the first in two years and could help lower domestic interest rates and corporates’ funding costs, enabling margin expansion and therefore resulting in an improved corporate earnings outlook. 

“Rate cut also reduces the chance of economic hard-landing and lowers the equity risk premium. Therefore, investors are willing to pay a higher valuation multiple for Chinese equities.”

Interest rate sensitive and highly leveraged sectors will be the obvious beneficiaries.

“We expect that the interest rate sensitive sectors [property, brokers, insurers] and highly leveraged sectors [power, construction and machinery] are major beneficiaries.”

The Robeco Chinese Equities Fund has been well positioned in these sectors due to their improving fundamentals, she added.

Sectors that are likely to lag behind are the defensive sectors, such as energy, consumer staples and telecom. 

On the other hand, the rate cut will have mixed impacts on banks as the asymmetric rate cut will negatively impact the net interest margin but have a positive impact the non- performing loan formation. 





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