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China rate cuts: top managers on what to expect next

China rate cuts: top managers on what to expect next

China announced another round of rate cuts late last week -- the sixth rate cut and fourth RRR cut in less than a year. The new monetary easing measures come on the heels of soft economic data -- GDP growth for the third quarter came in under 7%.

The new round of rat cuts also came just before the Fifth Plenum, currently ongoing, which most experts believe will lead to some announcements on the Chinese administration's committment to economic reforms.

Citywire Asia canvassed the views of top fund managers to find out whether the abundance of easing measures are having the desired effect on the economy.

Arthur Lau, PineBridge Investments

Co-head of emerging markets and head of Asia ex-Japan fixed income

The double cut in both reserve rate requirement and interest rates are in line with market expectation given that CPI remains low while PPI continues to be in negative trajectory.

The one surprise, however, is the removal of the deposit rate cap, which now marks the full interest rate liberalisation in the onshore banking market.

We expect the GDP growth to report a better number in Q4, thanks to the continued easing measures. Service sector is likely to remain resilient while the manufacturing/mining sector will continue to struggle due to weak global demand and over capacity. 

At the moment, we do not expect a further rate cut before the year end as policy makers focus on detailing the 13th five-year plan and medium economic and SOE reform in near term. Nevertheless, given that the onshore real interest rate remains high, we believe China will likely cut rates further in the next year.

Rates cut, along with the other easing measures, have already showed signs of improvement in few sectors, noticeably in property sector as prices and sales volumes in major cities rebound.

However, some sectors, such as commodity, mining and manufacturing, continue to face difficulty in getting financing amid deterioration in financial health.

Hence, we think the easing measures so far has not benefitted the economy across the board and therefore we do expect more cuts and additional easing measures in the medium term.

Raymond Ma, Fidelity

Citywire A rated portfolio manager of Fidelity Funds - China Consumer fund

This is the sixth rate cut and fourth reserve requirement ratio (RRR) cut since November last year, and the move is in line with our expectations given the weakening growth momentum and rising deflationary risk in China.

This suggests that the People’s Bank of China remains on an easing path and is determined to use policy easing to stimulate the real economy. Meanwhile, the removal of the deposit rate ceiling also signals a major step towards full interest rate liberalization.

Overall, these actions are positive to market sentiment and should encourage investment, consumption and support property market in the medium term.  

Charlie Awdry, Henderson Global Investors

Citywire A rated manager of the Henderson HF China fund 

I would describe it as 'underwhelming'. The move will not affect us as we were expecting a rate cut.

There might be a possibility of further rate cuts, but given additional fiscal stimulus efforts recently made it’s likely they will watch to see what impact recent measures are having on the economy before judging whether to move again.  

Xiao Li, Eastspring Investments

portfolio manager

There isn't much of a reaction because most people had expected this interest rate and RRR cut by the PBOC. There has now been six rate cuts since the PBoC started this current easing cycle which started back in November 2014.

The current move won’t affect my position in China. As a bottom up investor, we focus on company earnings and fundamentals to drive our investment decisions. Even prior to the current easing cycle in China, we had already been overweight Chinese banks as they provided a large margin of safety as most Chinese banks are still trading at around 0.7x Price to Book.

With further cuts in RRR, we can expect for improved earnings potential for Chinese banks as they will be able to reallocate more of their deposits into higher yielding products.

Given the current interest rate is already at 4.35%, which is already at its lowest levels over the past 10 years, the room for any further substantial decline in interest rates could be minimal. We could possibly see one or possibly two more rate cuts, but seeing interest rates substantially below 4% could be challenging for China.

But on the other hand, we do expect further RRR cuts to help maintain China's liquidity conditions as it tackles capital outflows.

Andy Seaman, Stratton Street Capital

Portfolio manager and partner

Whilst we expected a cut in the reserve ratio requirement (RRR), the rate cut was a surprise to us. We had anticipated that a change in the RRR in isolation would have been sufficient to stimulate growth and may have been sufficient to hit a 7% growth rate for 2015.

Over the next week or so we will know more about the next 5-year plan and from that we may deduce whether there was a political bias behind the rate cut itself in order to make those plans look more achievable.

From a Chinese perspective we would not expect further rate cuts, but as China becomes more integrated with the rest of the financial world, the PBoC, along with the Fed and the ECB, will be forced to take account of the global backdrop even if their direct mandate suggests a domestic bias is more appropriate; in an increasingly integrated financial system, central banks have to take account of global economic conditions.

So, whilst we don’t expect further interest rate cuts in China in the short run, the weakness of the global economy may force this upon them.

Until China has fully adjusted to their desire of a more domestically orientated economy, away from an export led one, then weakness in the global economy may yet prompt further rate cuts, even though from a domestic standpoint these may not be warranted.

For that reason we expect further rate cuts to be a reaction to global economic conditions and will have a more limited, albeit positive, impact on domestic growth. 

Florian lelpo, Unigestion

Head of macroeconomic research, cross asset solutions

One of the key sources of the Chinese slowdown is rooted within the excess of its housing market -- that is one of the most responsive sectors to interest rates.

Cutting rates is a clear sign of recognition that this sector is facing difficulties.

This move and the progressive diminution of the market’s oversupply notable for tier 1 and tier 2 cities are steps in the right direction.

Now, the other issue that weighs on the Chinese economy is the strong US dollar situation: to be consistent, the PBoC also needs to further devaluate its currency vs. US dollar: its exports also need to recover so that the country remains on its “soft-landing” track.

With a potential growth at 7% -- if not 6% -- this rate level is already a strong stimulus: not much rate cuts can be further expected.  

Those cuts are mainly there to stabilize residential and non-residential investments. Their impact on the housing market should be with us for the coming month.

However, non-residential investment – the heart of the Chinese 'soft landing' – is unlikely to be greatly affected by these rate cuts, reflecting more of saturation in Chinese investment opportunities and a change in the structure of its economy.

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