Research Note | Investors pin hope on China’s easing path

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    Investors pin hope on China’s easing path
    Investors pin hope on China’s easing path
    25 January 2022

    Key Highlights

    • China’s GDP outlook for 1Q22 still looks challenging
    • Spending could weaken further in the short term
    • But markets are encouraged by China’s monetary easing, in contrast to US rate hikes

    Muted new year celebrations

    China investors will be seeing in this Lunar New Year with a finely balanced mix of uncertainty and hope. While the country’s recovery from the pandemic stayed on track in 2021, there remains a large number of question marks over government policies, retail sales and persistent lockdowns. This is not a great economic foundation on which to kick off the new year, but the spate of monetary easing has already cheered the market. Greater property sector clarity in coming weeks could bring some long-awaited stability.

    If we just focus on China’s GDP growth in 2021, the picture appears relatively promising. The country’s full year growth of 8.1 percent was the highest since 2011 and stacked up well against the 5 to 6 percent growth in the EU and US. Fourth quarter growth of 4.0 percent was slower than the 4.9 percent seen in the third quarter but still managed to beat analysts’ expectations, driven by exports and factory output.

    Figure 1: Retail Sales Growth, 2Y CAGR

    Retail Sales Growth, 2Y CAGR

    Source: UOBAM

     

    However, economic indicators in December suggest that the first quarter of 2022 may be more challenging. While property sales were down, as might be expected, analysts were also alarmed by the steep drop in retail sales growth to only 1.7 percent from 3.9 percent in November. The two-year compound annual growth rate (CAGR) also weakened from to 3.1 percent from 4.4 percent the previous month.

    The pullback in spending was broad based including daily use goods, office equipment, home appliances and mobile phones. This is attributed to the re-imposition of Covid restrictions amid Omicron fears, and tightening property and tech restrictions in the name of “common prosperity”. There is little to suggest that domestic spending will resume in January, despite the run-up to the Lunar New Year celebrations.

    A few positives

    Despite the December overhang, a few factors give hope that economic and market weaknesses can be contained in the short term, and potentially reversed in the longer term. The first is China’s strong export growth. Even in the throws of supply chain disruptions, China managed to increase its trade surplus to US$ 676.43 billion in 2021, the highest on record since the 1950s.

    The second is the range of China’s accommodative monetary policies introduced over the past few months. Last week China’s central bank cut the one-year loan prime rate (LPR) by 10 basis points to 3.7 percent from 3.8 percent, having already cut the same rate from 3.85 percent back in December 2021.

    Figure 2: PBOC’s (People’s Bank of China) Interest Rate Cuts, Jan 2014 – Jan 2022

    PBOC’s (People’s Bank of China) Interest Rate Cuts, Jan 2014 – Jan 2022

    Source: Macrobond, UOB Global Markets and Economic Research

     

    This comes on top of a host of other accommodative actions. The five year LPR was reduced by 5 basis points, the reserve requirement ratio (RRR) was cut by 10 basis points, the one-year medium term lending facility rate (MLF) (the rate at which the central bank lends to large commercial banks) was cut by 10 basis points, and borrowing costs of seven-day reverse repurchase agreements (repos) was cut by 10 basis points.

    Such concerted efforts at monetary easing have not been seen since the start of the pandemic in April 2020 and is estimated to have added CNY 300 billion into the system. It sends a clear signal that Chinese policymakers are prepared to actively address economic speed bumps.

    Thirdly, markets appear to have noticed the stark difference in the China versus US stance on interest rates. Amid concerns about the start of the rate hike cycle in the US and runaway inflation, markets have welcomed the strong signals from Chinese policymakers that they are prepared to do the reverse.

    Figure 3: Regional Market Performance, Jan 1 – 21, 2022

    Regional Market Performance, Jan 1 – 21, 2022

    Source: Macrobond, UOB Global Markets and Economic Research

     

    This has helped boost the Chinese market, and in its wake, other Asian markets, since the start of the year. The bulls have come out to play amid the lure of Chinese company valuations, now at historical lows, and the prospect of more government support for the encumbered property sector.

    However, investors should expect a bumpy ride given the potential for China’s economic growth to disappoint in the near term. We expect 1Q22 GDP to be capped at 4.5 percent growth year-on-year, below the authorities’ target range of between 5 to 6 percent. In addition, the property crisis is set to rumble on with some high profile defaults a distinct possibility. On the other hand, we would not rule out more easing measures, which will help lift investors’ mood.

     

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