Schroders Quickview: China stimulus rolled out as growth stalls
China's cut to Banks' reserve requirement ratio signals growth concerns after a weak first quarter, but should not be read as “Chinese QE” or an attempt to weaken the currency and we expect more rate cuts to come in 2015.
20 April 2015
China cuts Banks' reserve requirement ratio
A data-heavy week in China was capped at the weekend by a larger-than-expected 100 basis points cut to the reserve requirement ratio (RRR).
What does the rate cut mean in real terms?
The RRR move should inject roughly 1.2 trillion renminbi into the system, boosting bank profitability and lowering corporate and government borrowing costs.
How will the rate cut impact growth?
The cut is growth positive, but so far not out of line with our expectations.
Though we had forecast 100 basis points (bps) of cuts this year, our expectations had been for a pair of 50 bps cuts rather than a single larger move.
Sequential growth should receive a boost from the RRR cut, but base effects will mean it is a struggle for the Q2 year-on-year number to post a significant improvement.
We expect interest rate cuts this quarter, followed by one more RRR cut around Q3, as the authorities continue to target growth stabilisation.
What the cut tells us about previous China growth data
First quarter growth may have been weaker than the officially reported number; our China growth tracker pointed to an especially sharp fall in March, slipping from around 7% to 6.2%, year-on-year.
While we do not subscribe to the view espoused in some quarters that growth was 3 to 4% - based on the partial perspective of the economy provided by the Li Keqiang index – growth was likely weaker than reported and heading rapidly downhill.
Rate cut to compliment fiscal policy
To us this seems a move aimed at supporting and complementing fiscal policy this year.
Fiscal reform has seen local government fiscal efforts stall, and this provision of liquidity will help create demand for the 1 trillion renminbi in local government bonds set to be issued this year.
It will also provide funds for the planned infrastructure stimulus, largely the domain of state-owned enterprises and local governments.
- Asia ex Japan
- Emerging Markets
- Craig Botham
- Monetary Policy
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us