Summary

 

China unveiled support for the property and stock markets, marking its first major co-ordinated easing in years. Chinese equities can continue to rise in the near term on the back of the liquidity and sentiment driven rally although a real improvement in fundamentals will be needed to sustain a medium-term uptrend. Meanwhile, Chinese government bond yields can still head lower as the PBoC eases monetary policy further.

On 24th September 2024, the People’s Bank of China (PBoC) announced a series of easing measures in a rare public briefing, aimed at stabilising the Chinese economy. While observers note that the measures were not a bazooka, it was importantly the first large co-ordinated easing which China has rolled out in the last few years. The measures, which could potentially unleash trillions of liquidity, covered multiple aspects including:

Monetary easing

  • 20 bps cut to the 7-day repo rate
  • 50 bps cut to the Reserve Requirement Ratio (RRR), with the flexibility of a further 25 bps to; 50 bps before year end

Strengthening the banks 

  • Recapitalising the core tier-one capital of China’s big six state banks

Stabilising the property sector

  • 50 bps cut to the existing mortgage rate
  • Lowering the downpayment for second home purchase from 25% to 15%, to be line with first home purchases

Supporting the stock market

  • An equity swap line (plus buyback facility) of RMB500bn that will allow brokers/insurers/mutual funds to borrow money directly from the PBoC, with the potential of two additional liquidity rounds If needed, bringing the total support to RMB1.5tn

The Chinese equity markets rallied on the back of the announcement, with the CSI 300 Index and Hang Seng Index up 4.6% and 4.1% respectively and the Hang Seng China Enterprise Index (H-share) outperforming with a 5.1% gain. China’s 10-year government bond yield fell to 2% for the first time1.

Investment implications

The US-led rate cut cycle has opened a window of opportunity for China to launch pro-growth policies. This is timely given China’s lacklustre economic growth year-to-date, and the upcoming 75th anniversary of the country’s political party on 1st October.

Given the unprecedented nature of some of the measures, Eileen Ma, Portfolio Manager, Multi Asset Portfolio Solutions (MAPS), believes that Chinese equities can continue to move higher in the short-term on the back of the liquidity/sentiment boost. However, evidence of a real improvement in fundamentals will be needed to sustain a medium to longer-term uptrend. The MAPS team will continue to monitor the implementation details of the PBoC funding channel, the potential fiscal policy announcement, and look for signs of economic data improvement. US election risks will also play an important role in the coming few months.

Views of the respective China equity and bond markets are as follows:

China A equities: Watching for further fiscal easing

In the past quarter, investors have grown increasingly frustrated, as the Chinese economy continued to lose momentum, and no effective measures have been introduced. Therefore, to Jingjing Weng, Head of Research, China A equities, it is not surprising that the announcement of the stimulus measures has led to such a strong rally in both the A- and H-share markets.

For Jingjing, key highlights in the stimulus measures include PBoC’s clear and positive policy guidance (for the first time) that it can further lower the RRR by another 25 to 50 bps by year end. Notably, it is also the first time the central government is encouraging financial institutions to use leveraged funds to buy A-shares. Most importantly, the PBoC hinted of a more proactive fiscal policy. This suggests that the central bank may stop intervening in the long-term government bond market as it did in the past several months in trying to manage the rapid rally in bond prices. This paves the road for more fiscal easing which has been long awaited by the market.

While Jingjing believes that the recent rally reflects improved investor risk appetite and a better policy outlook, further market upside will need to come from 1) greater fiscal easing; 2) more clarity on the set-up of the funding support to non-financial/listed companies and 3) better economic data. Jingjing feels that greater fiscal spending, or a larger fiscal deficit must be in place before we can envisage any growth recovery or fundamental improvement in the Chinese economy.

China H equities: National Team to front load purchases

According to Jocelyn Wu, Portfolio Manager, Greater China equities, she expects the National Team2 (NT) to follow their January playbook and front-load their equity purchases at a rate close to USD5 bn/day. At the point of writing, the inflows into the Exchange Traded Funds (ETFs) targeted by the NT have reached levels comparable to those seen during the July intervention, implying inflows of about USD3.5bn/day. Although these inflows are not as large as in January, they are significant enough to send a strong positive signal to the market. As such, Jocelyn believes that the H-share market could experience further gains in the near term given attractive valuations and the lift in investor sentiment from the positive policy surprise.

The Greater China equity team believes that growth-oriented stocks are likely to benefit more from the improvement in investor sentiment. They see attractive opportunities in E-commerce stocks which have been trading at low valuations due to the lack of foreign investor interest. With the overhang of interest rate cuts on existing mortgages now removed, select Chinese banks may also look attractive. Meanwhile, beaten-down consumer stocks may also benefit from follow-on policies that could lift consumption.

China government bonds: Yields can fall further

Chinese government bond yields fell (i.e. bond prices rose) initially on the news of the monetary easing measures. However, bond investors subsequently grew concerned over market expectations that further fiscal measures could be announced soon.

Although the balance of risks has shifted, Matthew Kok, Portfolio Manager, Asian Fixed Income, believes that China bond yields can fall further. The PBoC has indirectly indicated that their policy adjustments are influenced by the Federal Reserve (Fed) and the RMB. With the Fed poised to cut rates further, it gives the PBoC more room to ease monetary policy, which should be favourable for bonds.

While there could be some rotation of funds from bonds into equities, the overall injection of liquidity can also support yields moving lower. This is because investors are likely to look for better-yielding assets as onshore deposit rates fall sharply.

This should lead to a sustained demand for wealth management products. Additionally, banks’ demand for China government bonds is likely to remain intact until credit growth catches up with the surge in liquidity, a process which is expected to take some time.

While the easing measures are positive for the economy, Matthew feels that significant fiscal support may not materialise that quickly as China is still focused on deleveraging the economy. Measures to support growth are likely to be aimed at stabilising the economy, rather than providing a strong boost to some parts of the economy such as the property sector. Meanwhile, given the overcapacity issues in several parts of the manufacturing sector, as well as falling input and output prices, China’s inflation is likely to stay low for some time, potentially keeping a lid on bond yields. With the yield curve likely to bull-steepen on the back of the PBoC’s easing, the Asian Fixed Income team prefers the 5–7-year part of the curve.

Interesting reads

Know more
Why invest in Global Emerging Market equities now?

in insights

Why invest in Global Emerging Market equities now?

28 Oct | Samuel Bentley

The US Fed’s rate cutting cycles have historically correlated positively with the ...

Not all durations are equal

in insights

Not all durations are equal

09 Oct | Pierre-Julien Jandrain , Rong Ren Goh

Given that the Fed has begun easing rates, incorporating non-USD duration into bond ...

Low volatility: A remedy for the extremes?

in insights

Quantitative

Low volatility: A remedy for the extremes?

02 Oct | Chris Hughes , Michael (Xiaochen) Sun

Recent events are a strong reminder that volatility spikes are likely to continue and ...

Building a holistic transition investing framework for capital markets

in insights

Multi asset

Building a holistic transition investing framework for capital markets

23 Sep | Brandon Lam , Joanne Khew

A differentiated just transition investing approach is needed across countries ...

It’s an outsized rate cut from the US Fed

in insights

Multi asset

It’s an outsized rate cut from the US Fed

19 Sep

A front-loaded rate cut reduces the risk of a hard landing

The art of turning risks into opportunities

in insights

The art of turning risks into opportunities

12 Sep | Rong Ren Goh

With the market positioning for a Fed pivot, investors in money market funds face the ...

India and China: Redefining resilience

in insights

India and China: Redefining resilience

04 Sep | Yuan Yiu Tsai

India and China have unique factors which will help them to be more resilient during ...

A durable approach to Japan equities

in insights

A durable approach to Japan equities

28 Aug | Japan Equity Team

The ongoing structural changes make Japan the stand-out market globally.

30 years of Asian equities: A journey of growth and opportunities

in insights

30 years of Asian equities: A journey of growth and opportunities

14 Aug

Asia’s financial markets have been a gateway for investors to tap into the region’s ...

30 years of Asian bonds: A path to greater diversification and income

in insights

Fixed income

30 years of Asian bonds: A path to greater diversification and income

07 Aug

Asian bonds are a resilient asset class, providing stable returns even through equity ...

Sources:
1 Source: Bloomberg. In USD terms. 24 September 2024
2China’s “National Team” refers to a group of state-backed entities, including state regulators, state-owned or backed securities firms, brokers, investment funds, and banks. This team is tasked with stabilising the stock market by making strategic purchases to boost investor confidence and prevent market downturns.

The information and views expressed herein do not constitute an offer or solicitation to deal in shares of any securities or financial instruments and it is not intended for distribution or use by anyone or entity located in any jurisdiction where such distribution would be unlawful or prohibited. The information does not constitute investment advice or an offer to provide investment advisory or investment management service or the solicitation of an offer to provide investment advisory or investment management services in any jurisdiction in which an offer or solicitation would be unlawful under the securities laws of that jurisdiction.

Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the strategies managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Where an investment is denominated in another currency, exchange rates may have an adverse effect on the value price or income of that investment. Furthermore, exposure to a single country market, specific portfolio composition or management techniques may potentially increase volatility.

Any securities mentioned are included for illustration purposes only. It should not be considered a recommendation to purchase or sell such securities. There is no assurance that any security discussed herein will remain in the portfolio at the time you receive this document or that security sold has not been repurchased.

The information provided herein is believed to be reliable at time of publication and based on matters as they exist as of the date of preparation of this report and not as of any future date. Eastspring Investments undertakes no (and disclaims any) obligation to update, modify or amend this document or to otherwise notify you in the event that any matter stated in the materials, or any opinion, projection, forecast or estimate set forth in the document, changes or subsequently becomes inaccurate. Eastspring Investments personnel may develop views and opinions that are not stated in the materials or that are contrary to the views and opinions stated in the materials at any time and from time to time as the result of a negative factor that comes to its attention in respect to an investment or for any other reason or for no reason. Eastspring Investments shall not and shall have no duty to notify you of any such views and opinions. This document is solely for information and does not have any regard to the specific investment objectives, financial or tax situation and the particular needs of any specific person who may receive this document.

Eastspring Investments Inc. (Eastspring US) primary activity is to provide certain marketing, sales servicing, and client support in the US on behalf of Eastspring Investment (Singapore) Limited (“Eastspring Singapore”). Eastspring Singapore is an affiliated investment management entity that is domiciled and registered under, among other regulatory bodies, the Monetary Authority of Singapore (MAS). Eastspring Singapore and Eastspring US are both registered with the US Securities and Exchange Commission as a registered investment adviser. Registration as an adviser does not imply a level of skill or training. Eastspring US seeks to identify and introduce to Eastspring Singapore potential institutional client prospects. Such prospects, once introduced, would contract directly with Eastspring Singapore for any investment management or advisory services. Additional information about Eastspring Singapore and Eastspring US is also is available on the SEC’s website at www.adviserinfo.sec. gov.

Certain information contained herein constitutes "forward-looking statements", which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof, other variations thereof or comparable terminology. Such information is based on expectations, estimates and projections (and assumptions underlying such information) and cannot be relied upon as a guarantee of future performance. Due to various risks and uncertainties, actual events or results, or the actual performance of any fund may differ materially from those reflected or contemplated in such forward-looking statements.

Eastspring Investments companies (excluding JV companies) are ultimately wholly-owned / indirect subsidiaries / associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.