Hamon’s Market Update: China Rate Cut – June 7, 2012

2012年06月07日 星期四


China’s Central Bank (PBOC) announced to cut both deposit and lending rates by 25bps last night (June 7, 2012) to 6.31% and 3.25% respectively, which came ahead of market expectations. Additionally, the PBOC also announced that the deposit rate upper limit as 1.1 times of base rate and lending rate floor as 0.8 times of base rate.

Hamon’s Interpretation:

A further easing sign and earlier than market expected: Amid concerns of decelerating economic growth and external uncertainties, Beijing decided to cut its main interest rate earlier than market forecasts. Since October 2011, policy makers have been easing selective policies in order to support growth. First, Beijing accelerated the approval process for infrastructure projects. Next, the PBOC began easing monetary policies, cutting the reserve requirement ratio 3 times since the end of last year. In the near term, we should see further policy relaxation in the property sector if the country’s economic assessment remains sluggish during the second half of the year.

Oct 11 was the bottom of this cycle: October 11 was the bottom of this recent cycle, as markets reflected a hard landing recovery. With high frequency data demonstrating resilient growth fundamentals, stocks recovered as the soft landing scenario is now taking course. But due to the European debt crisis, the MSCI China valuation has return to its Nov 11 levels, trading at its closest valuation to 2008 historical trough versus other major markets. We feel that the market has heavily discounted an unlikely collapse in global demand, and does not reflect the benefits of easing borrowing costs and fiscal policies that China still commands.

Lower cost of funding ahead in 2H11: China’s short-term funding cost have dramatically come off since Oct 11, which triggered the first rally of interest rate sensitive stocks. Today’s rate cut would effectively lower long term funding cost as well, which would largely improve loan demand and pull cost of funding done for almost all Chinese companies.

Asymmetric rate cut will help loan demand: Unlike the 2008 cycle, the most recent rate cut is an obvious asymmetric move, meaning more lending rate versus deposit rate cuts. The rate move is also a step forward to more interest rate liberalization in our view. This will further buttress the real economy, especially small medium enterprises (SME), which should see lower funding costs. Conversely, this would be slightly negative to Chinese banks, which we have been underweight.

External environment is still a risk: Ongoing uncertainties surrounding the European debt will continue to weigh on risky assets, including Chinese equities. However, these factors should gradually ebb as China’s economy recovers in the second half of the year when new leading commences. As global risk factors settle, flows will return to EM from DM, with Chinese equities the likely largest beneficiary.

Portfolio strategy: Over the next 12 months, Chinese markets should edge higher. Further structural opportunities will rise amid the arrival of new leaders. We will maintain an overweight position in non-bank financials, including property developers, brokers, insurance, and consumer discretionary names. We are also positive on technology, selective industrials. We are underweight banks, telecommunication stocks and utilities.