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Chinese rate cut: managers analyse the sudden move

Chinese rate cut: managers analyse the sudden move

The Chinese government’s second rate cut in a month was unexpected by markets but while managers welcome others questions whether it is really needed.

Speaking exclusively to Citywire Global, Asian and Chinese equity managers based in both Asia and Europe give us their views of what this means for China and global markets.

The view from Hong Kong

Hong Kong -based manager Jun He who runs the Comgest Growth Greater China US Dollar fund believe the cut was actually needed to control growth:

‘I don’t recall when they cut the rates so aggressively. I believe the last time was in 2008. It’s quite clear that the top policy makers are worried about the growth levels.’

‘There has been a gradual shift of their priority. Last year it was controlling the pace of its economy to avoid overheating. Then around April, figures showed a rather faster deceleration of growth than they were expecting. Since then the discourse has changed saying they want to stabilise growth.’

‘I don’t think the cut was really needed but I am happy to see them use interest rate cuts to stimulate the economy. I just hope the banks will continue to apply stringent product assessment to avoid giving out bad loans.’

‘The right policy is to allow the better part of the economy, consumption, infrastructure, the capex to grow and reduce the other parts. They should reduce the spending on the big infrastructure projects, like some high speed rails. China can tolerate one or two years of slower growth and allow the economy to be readjusted to a more balanced structure.’

‘The Chinese government has been interfering with the economy in all sorts of ways, especially over the last five years. It has been heavy-handed when it needs to step back and let the economy run its own course and allow China to reach growth levels that are sustainable over the long term.’

The view from Europe

Switzerland- based Thomas Schaffner, Citywire A-rated manager of the Vontobel Fund China Stars Equity fund said:

‘The cut by itself was not a surprise but rather the timing. It seems it was coordinated with the ECB. It was probably to send the signal to markets that they are working together.'

‘Overall it was positive for the Chinese economy as its liquidity will continue to improve. It is a further step to the deregulation of its interest rates which is an important step for them to make.It is negative for banks in the short term because it puts pressure on their interest margins. We were positioned for a cut but things seem to happening faster than expected.’

Following the rate cut he said he is increasing his underweight in financials by 2% and said investors need to focus on Chinese banks with strong deposits. He is also upping his overweight exposure to the Chinese property and insurance market as he expects them to benefit from this move.

The view from Singapore

The Singapore-based Asian equity manager Bill Sung, CIO of Absolute Asia, said:

‘The Chinese rate cut is in line with what we have been hearing from senior officials on plans for more easing. They want to make sure they reach their GDP target for this year when the external environment has worsened substantially. It may have coincided with timing from Europe, but this is definitely about Chinese policy.’

‘It feels like an interest rate reform and a reform in the banking sector. Both the deposit rate and the lending rate are no longer fixed. With cuts to the reserve requirement ratio, it will mean that banks have more to lend which will boost revenue and cushion the squeeze in margin from interest rate cuts.’

‘We still remain underweight the banking sector however. We don’t yet know the impact of the interest rate squeeze on the banking sector and how much the lowering in reserve requirements will compensate the impact of a margin squeeze.’

‘The property sector will also be a beneficiary from the interest rate cut but the big risks are still that the Chinese government will tighten measures as they are still concerned about a bubble.’

‘We remain overweight property as we think in the longer term there is still demand and the property sector remains really cheap. We are also very much overweight the material sector and iron ore despite concerns of the slowdown in the economy.’

‘We think the depression is not due to demand but due to speculation and the question of commodity prices which in the longer term makes us happy with the position although we are suffering from it now.’

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