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Easing euphoria or policy pains: managers on China’s snap rate cut

Easing euphoria or policy pains: managers on China’s snap rate cut

The Chinese central bank announced an unexpected 25 basis point cut in its policy rate for the second time in three months at the end of February.

Given the timing of the decision, fears over the extent of the Chinese economy's slowdown have come to the fore. The economy expanded 7.4% in 2014, which is its slowest pace in nearly a quarter of a century, while many experts believe growth could slow further to around 7% this year.

Citywire Asia has collated the views of leading fund managers in the region to find how they are interpreting the rate cut and what it means for China's growth prospects.

, Manulife Asset Management

Citywire A-rated manager, Manulife Global Funds - Dragon Growth

We believe that the rate cut represents the right action taken at the right time and expects it to be supportive of the A-shares market, particularly those that will benefit directly from government support. This includes players in the healthcare, environmental protection, e-commerce and property development sectors.

Similarly, lower rates are feeding the current trend of renminbi (RMB) depreciation, which is likely to support manufacturers and exporters. We expect to see further support measures in 2015 as China generally remains behind the curve on monetary easing – this could include further interest rate or RRR action.

William Fong, Barings

Portfolio manager, Baring China Select Fund

The cut will benefit high gearing companies, but not all of them are appealing to our portfolio. We focus on long term structural growth in sectors such as health care, technology and travel, which may not necessarily benefit from this rate cut in the short term‎.

More economic sensitive sectors like construction, property and machinery will be more affected in the long term‎. At the moment we feel very comfortable with our positioning for China's long term growth and will review our position from time to time. 

The biggest risk to the Chinese economy is its slowdown. However, the government has been very proactive in managing weaker data and higher volatility. This has given us some comfort.

The second risk is China’s exports, which have been supported by US economic recovery in the past. Once we see a tightening cycle in the US, this could lead to less demand.

Stephen Chang, JP Morgan AM

Head of Asian fixed income

Disinflationary pressures have led to a rise in real rates which puts further pressure on the economy and borrowers, while onshore liquidity continues to remain tight, necessitating rate cuts.

Monetary easing and the soft patch in the Chinese economy support our preference to be overweight duration in China government bonds. Other sectors which are interest rate sensitive should also benefit but the dynamics will depend upon the offsetting macro slowdown trend in place.

The Chinese economy is in a downward trajectory, plagued by overcapacity and over-leverage. Key structural reforms are gaining some traction but could result in more short term pain before longer term gain. The rate cut was within expectations though the exact timing, some three months after the last rate cut, was slightly earlier than expected.

Arthur Lau, Pinebridge

Citywire A-rated manager and head of Asia ex-Japan fixed income

I believe the overall impact to the market is positive as it welcomes policymakers’ moves that support economic growth. Nevertheless, it is slightly negative for FX as we see that the CNY exchange has continued to trend lower.

Despite the improving current account surplus, China’s FX reserves have not grown, partly due to the FX translation (as CNY and other currencies weaken against the US dollar), and partly due to the impact on the potential delay of overseas US dollar conversion/remittances back to China.

The market has formed the opinion that China’s FX needs to be lower to stay competitive, therefore, the rate cut so far has been gradual. However, as many central banks in the region and globally have undertaken some form of easing, the concern about the impacts of further depreciation of the RMB has lessened  - therefore even if further RMB depreciation does occur, the negative impact of a rate cut to FX should be less of a concern currently.

As such, any negative implication from the rate cut in terms of FX will therefore become manageable. This, along with continued falling PPI (producer price index, which measures wholesale prices) and CPI, allowed room for the cut.

I expect more easing in 2015. The real interest rate remains high and I believe rate cuts may not be sufficient. We do expect a RRR (reserve requirement ratio) cut this year. This should help ease concern of a sharp slowdown in economic growth in the near term.

Jamie Grant, First State Investments

Head of Asia fixed income

Economic conditions are continuing to decline and it seems now we can expect to see upcoming data continue to weaken. The effect of this cut is difficult to see as yet. The most recent cut has not stemmed the decline in economic data.

The housing market continues to weigh on the economy, and inflation is declining. Whilst we were surprised by the timing of the cut, we are not surprised that cuts are continuing as it is looking increasingly difficult to slow the pace of economic contraction.

We watch carefully the outlook for inflation in the coming quarters for guidance on the future path of interest rates and reserve requirement ratio (RRR).

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