With China’s consumer price index at 1.60% in September, real interest rates are still high, according to Allianz Global Investors.
“Therefore, we believe there will be further rate cuts and potentially other forms of monetary easing to come. This is likely to be supportive of Chinese equities, particularly financials and more cyclical sectors which are widely under-owned across the market.”
On a similar note, JP Morgan Asset Management said it believes the central bank will continue to ease monetary conditions by further cuts in repo rates and benchmark rates as well as the reserve requirement ratio (RRR), though the timing would be data dependent.
“There is a plenty of room to lower the current 19% reserve requirement in the banking system, which essentially is a tax on the banks that potentially lowers the efficiency of the banking system and its ability to support the real economy,” JP Morgan AM said.
“More accommodative monetary policy should be supportive to Chinese stock markets, and the expectations of more easing measures combined with attractive valuations give room for a re-rating in the short term.”
Sector beneficiaries
JP Morgan AM said interest rate-sensitive sectors such as brokers, insurers, property, machinery and sectors with companies holding a higher debt level such as independent power producers could be possible beneficiaries.
“While the asymmetric nature of the rate cut could hurt banks’ net interest margins, lower borrowing costs benefit the banks by reducing NPL [non-performing loan] formation.”
Allianz Global believes the rate cut will drive more liquidity and the A-share market is likely to be the primary beneficiary.
In its China A-shares equity strategy, Allianz Global Investors had a 37% allocation to financials as of 31 October.
“Within [financials], we have been adding both to our positions in brokers and property companies, concentrating on the market leaders which fit our quality, growth and valuation approach,” Allianz said.
Interest rate cuts
The rate cut announcement by the People’s Bank of China on 21 November was the first in more than two years.
The PBoC slashed the one-year benchmark lending rate by 40 basis points to 5.6% and reduced the one-year benchmark deposit rate by 25 bps to 2.75%.
“We see two main reasons for the cut. The first is to provide a degree of stabilisation to the slowing economy and is likely a response to the property sector weakness in particular. In addition, for the reform agenda to be successfully implemented, a stable economy is important. The second is that this marks a step towards interest rate liberalisation,” Allianz said.
The central bank also reduced the types of different lending and deposit rate benchmarks available, as a step towards interest rate liberalisation.
“This is clearly a signal that the PBoC wants Chinese banks to compete for funding as part of its plan to achieve full deregulation of deposit rates.”
