Children in Germany were busily preparing for the arrival of St Nicholas on the evening of 5th December and looked forward to waking up to sweets and coins overflowing their freshly polished shoes. Investors also received a treat on 5th December, with the announcement that China’s Central Bank will cut the reserve requirement ratio by 50bps on that day.
According to Simon Finch from Ashburton Asian Equities Team, ‘While some regard this cut as earlier than anticipated, it is a clear signal from the Chinese policy makers that they mean business in terms of trying to protect growth. Since August 2011 the government has sought to engineer a credit growth slowdown which has lead to tightening liquidity conditions, effectively resulting in an estimated RMB900bn of liquidity being withdrawn from the financial system. Coupled with a depressed global macro economic situation, it is evident that the government now believe that the easing undertaken thus far has been insufficient to ensure a soft landing. This ratio trimming should lead to improved bank lending capacity, and will approximate to RMB350bn being injected into the system.
With economic conditions unlikely to change course in the coming months and the fact that data is continuing to worsen, a further rate cut in early 2012 could happen. The November PMI figures just released were 49.0 the first time this number has been below 50 since February 2008. A rating below 50 indicates the economy is contracting. The Chinese property sector has been under significant pricing pressure, particularly since the introduction of the House Purchase Restrictions in July 2011 designed to take the heat out of property bubble.’
The implications for the stock markets were witnessed immediately the announcement was made with European bourses collectively jumping up more than 1% on the news. Stocks that have been beaten down in recent months, such as financials and infrastructure should see a snap back rally as China becomes a risk-on trade into the year end. We should highlight however that this policy change is done not to engineer a new path of growth but to cushion the impending economic landing.
Suraj Sookdhew, RMB Private Bank Portfolio manager added, ‘Where rising inflation was a concern for the Chinese government for most of 2011, slowing growth has seemingly become the primary issue. The November PMI reading of 49, confirms that the Chinese economy is contracting. Our expectation for GDP growth for the Chinese economy is expected to decline from 10.3% in 2010 to approximately 9.1% in 2011. The 2012 outlook is for an even further slowdown, forecast at around 8% for the full year.
This economic slowdown in driven primarily by a contraction in Chinese bank lending coupled with declining exports to the slowing economies of the Euro zone and the USA. In an attempt to protect growth and create a ‘soft landing’, the Chinese authorities surprised the market by cutting the reserve requirement by 50bsp. Furthermore, it is expected that we could see further monetary policy easing in early 2012.
Whilst we view the decision taken by Chinese authorities, in their attempt to cushion their economy, as supportive for commodity prices and the South African economy, we maintain that local growth will remain pegged to developments out of Europe and other developed markets. The outcome of the meeting of European leaders on the 9 December 2011 will be of greater significance in providing direction for both the Euro zone as well as global economies and markets.’
Whether we’ve been good boys and girls this year and receive the alpha present we are wishing for remains to be seen, however this news should certainly read as a positive for those invested in the equity markets.
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