The current market seems to have priced in three “NO”s – no trade deal in sight, no major Chinese stimulus on the way and no falling off a cliff scenario for China’s economy. With such low expectations in the investor communities, any positive change in the margin may trigger a meaningful rebound in investor confidence. We believe there are two potential market catalysts which are worth watching out for. First, potential further interest rates and Reserve Requirement Ratio (RRR) cuts, and second, the central government may raise special bond quota from the current level of 2.15 trillion yuan1.
More RRR Cuts and Fiscal Stimulus
On September 6, the People’s Bank of China (PBoC) announced it would cut RRR by 50bps for all banks and an additional 100bps for qualified commercial banks in lower tier cities, releasing 900 billion yuan and injecting liquidity into manufacturing industries and private companies, rather than to the housing market2. Furthermore, according to the latest poll by Reuters, analysts expect the PBoC to cut another 50bps in 4Q19 and look forward to two more RRR reductions in the first half of 20203.
On the fiscal front, local governments have finished sales of the full-year quota of local government bonds in the first nine months of 2019, a 51% increase YoY4 . There have been expectations in the policy circle in Beijing that the early completion of the sales of this years’ local government bonds could prompt the central government to allow advance the roll-out of next year’s sales program, from 1Q 2020 to 4Q 20195. Clearly, this measure will help cushion any near-term economic shocks from the trade conflicts.
Better-quality Policy Decisions to Support Higher-quality Growth
Over the last one and a half years, we noticed that the top economic policy makers in Beijing are demonstrating much better quality in their policy formulation and decisions. Specifically, we are referring to the discipline, the tempo in policy roll-out and the ability to prioritize policy goals as well as to strike balances between different conflicting objectives. This might be the result of hard-earned experiences, as the top policy echelon has been in the center of various storms over the last decade. We are inclined to attribute this to a lower equity risk premium that investors are willing to assign to the market, despite the economic uncertainties remain challenging, compared to what prevailed in 2018. We see the government making progress in pursuing higher-quality growth while controlling financial risks, evidenced by the latest Total Social Financing (TSF) data. September outstanding TSF stood at 219.04 trillion yuan, up +10.8% YoY, while off-balance-sheet credit continued to decline3. Also, more medium-to-long-term loans went to infrastructure and hi-tech manufacturing sectors rather than real estate, indicating that liquidity has been filtering through to the real economy.
Global Backdrop Giving China More Policy Room
Additionally, we don’t expect big concerns over capital flight. The substantial interest rate spreads between China and developed economies (see chart below1), which are still expanding, may attract more offshore capital inflow, as evidenced by global fixed income investors’ enthusiasm upon the removal of QFII & RQFII investment quotas announced on September 10. The yield spreads are likely to provide support to the RMB. Thus, we don’t expect any abrupt devaluation (similar to what happened in August 2015) to recur at the current juncture, and instead, the currency will show more two-way volatilities rather than one-sided movements.
|10-Year Government Bond Yield1|
|Sep 2019||Sep 2018|
Given the current tendency of major central banks to pursue an
easing stance, we believe that this has formed a benign backdrop for China to
marginally ease its monetary stance without compromising the robustness of its
 Source: Bloomberg, as of Sep 2019
 Source: Reuters, as of Sep 2019
 Source: Reuters, as of Oct 2019
 Source: Yicai, as of Sep 2019
 Source: Yicai, as of Oct 2019
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