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Chi Lo: Patient Investors Should Build Up China Exposure Now
In this episode of China Money Podcast, senior strategist for Greater China at BNP Paribas Investment Partners Chi Lo, talked with out host Nina Xiang about the future policy direction of the Chinese central bank; why he believes the biggest risk in the Chinese economy is a property correction and its knock-on effect on banks and other sectors; as well as his advice for investors on building exposure to China now.
Read an excerpt below, but be sure to listen to the full episode in audio. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: Earlier this month, the People's Bank of China (PBoC) announced a selective bank reserve requirement ratio (RRR) cut of 0.5%. Now the big question on everyone's mind is: Will the Chinese central bank extend the RRR cut to all Chinese commercial banks. What's your view?
A: It depends. I think the PBoC's policy move will be data dependent in the next few months. It will depend on how the economy reacts to the selective RRR cuts and also the mini-stimulus packages implemented in the past few months. If the numbers react well, then I don't think there will be a need for a universal RRR cut or an interest rate cut.
We think the PBoC is taking a universal RRR cut and interest rate cut as a last resort. Our base case forecast is for the Chinese economy to recover during the second half of the year. Therefore, no major further monetary loosening is needed.
Q: Which economic indicators do you think the Chinese government will focus on to determine if the economy is responding well to their policy measures?
A: I think they will focus on bank credit, because that's a key leading indicator. They will also focus on electricity power output, transport volume growth, as well as the property market. Depending on how deep the property market correction will go, the authorities will decide how much easing they want to put into the economy.
Q: Some economists argue that an across-the-board RRR cut will not stimulate bank lending that much. Do you agree?
A: Overall, I do. The smaller and rural banks in China have about 7% excess reserve above the official minimum bank reserve requirement ratio. For the other banks, they also have excess reserve ratio of 2% to 3%, which means they are already putting aside 22% to 23% of reserves, above the official 20% official RRR. So it's hard to tell if the RRR cut will be effective.
The problem with the Chinese economy is that the system is too used to bailouts when something goes wrong. This time around, Beijing has been holding off any significant bailout because its policy objective has changed from "growth quantity" to "growth quality". It's not easy. It's painful.
Q: So you see there will be more pain, more bankruptcies in the economy?
A: You already see property developers and corporates jumping and yelling that there is not enough liquidity. But the truth is that the amount of liquidity now is just less when compared to past cycles, but it's still (ample). When you look at the total aggregate financing numbers, there is still a lot of money being pumped into the economy. This is a normalization of liquidity growth in China.
Q: In another word, it's China's own tapering?
A: You can say that. Actually, China tapered much earlier than the U.S. Federal Reserve. China started tapering about a year ago.
Q: How should China manage the process of injecting market disciplines in the economy, but also not to go too far to cause unwanted social pressure?
A: On a macro level, a growth rate of 7% to 7.5% is what I call the "pain threshold." China's Premier Li Keqiang recently reiterated that he wanted to see 7.5% GDP growth this year. I don't think they will be very strict about the 7.5% objective. As long as there is progress on structural reforms, Beijing will be okay with growth lower than 7.5% but above 7%.
Bankruptcies will also rise, and this is part of Beijing's game plan.
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By ChinaMoneyNetwork.com
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In this episode of China Money Podcast, senior strategist for Greater China at BNP Paribas Investment Partners Chi Lo, talked with out host Nina Xiang about the future policy direction of the Chinese central bank; why he believes the biggest risk in the Chinese economy is a property correction and its knock-on effect on banks and other sectors; as well as his advice for investors on building exposure to China now.
Read an excerpt below, but be sure to listen to the full episode in audio. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: Earlier this month, the People's Bank of China (PBoC) announced a selective bank reserve requirement ratio (RRR) cut of 0.5%. Now the big question on everyone's mind is: Will the Chinese central bank extend the RRR cut to all Chinese commercial banks. What's your view?
A: It depends. I think the PBoC's policy move will be data dependent in the next few months. It will depend on how the economy reacts to the selective RRR cuts and also the mini-stimulus packages implemented in the past few months. If the numbers react well, then I don't think there will be a need for a universal RRR cut or an interest rate cut.
We think the PBoC is taking a universal RRR cut and interest rate cut as a last resort. Our base case forecast is for the Chinese economy to recover during the second half of the year. Therefore, no major further monetary loosening is needed.
Q: Which economic indicators do you think the Chinese government will focus on to determine if the economy is responding well to their policy measures?
A: I think they will focus on bank credit, because that's a key leading indicator. They will also focus on electricity power output, transport volume growth, as well as the property market. Depending on how deep the property market correction will go, the authorities will decide how much easing they want to put into the economy.
Q: Some economists argue that an across-the-board RRR cut will not stimulate bank lending that much. Do you agree?
A: Overall, I do. The smaller and rural banks in China have about 7% excess reserve above the official minimum bank reserve requirement ratio. For the other banks, they also have excess reserve ratio of 2% to 3%, which means they are already putting aside 22% to 23% of reserves, above the official 20% official RRR. So it's hard to tell if the RRR cut will be effective.
The problem with the Chinese economy is that the system is too used to bailouts when something goes wrong. This time around, Beijing has been holding off any significant bailout because its policy objective has changed from "growth quantity" to "growth quality". It's not easy. It's painful.
Q: So you see there will be more pain, more bankruptcies in the economy?
A: You already see property developers and corporates jumping and yelling that there is not enough liquidity. But the truth is that the amount of liquidity now is just less when compared to past cycles, but it's still (ample). When you look at the total aggregate financing numbers, there is still a lot of money being pumped into the economy. This is a normalization of liquidity growth in China.
Q: In another word, it's China's own tapering?
A: You can say that. Actually, China tapered much earlier than the U.S. Federal Reserve. China started tapering about a year ago.
Q: How should China manage the process of injecting market disciplines in the economy, but also not to go too far to cause unwanted social pressure?
A: On a macro level, a growth rate of 7% to 7.5% is what I call the "pain threshold." China's Premier Li Keqiang recently reiterated that he wanted to see 7.5% GDP growth this year. I don't think they will be very strict about the 7.5% objective. As long as there is progress on structural reforms, Beijing will be okay with growth lower than 7.5% but above 7%.
Bankruptcies will also rise, and this is part of Beijing's game plan.