Pain for China stock funds, with strategists at Goldman, Credit Suisse confounded by PBOC’s token easing move

Name: How Covid shut down Shanghai
Uploaded: 2022-04-17T23:30:13.000Z
Duration: 5 min 59 s
Description: How Covid shut down Shanghai

China’s central bank lowered banks’ reserve ratio by only 25 basis points on Friday, the smallest cut in history, against expectations of a bigger shot in the arm

Rolling lockdowns add second- and third-order hits to confidence, consumption and wage growth, diminishing the multiplier effect of large stimulus

3-MIN READ3-MIN

Workers in protective suits keep watch on a deserted street during a lockdown in Shanghai on April 16. Photo: Reuters

Cheryl Heng

Published: 7:30am, 18 Apr 2022

China stock fund managers are facing another quarter of discontent after a bashing last quarter and a mismatch in expectations. The central bank has also offered a token policy easing against bets for a cure-all dosage.

The MSCI China Index, which tracks 742 stocks with a market value of US$2.2 trillion, fell 1.3 per cent last week. This year’s 15.5 per cent decline, including a dip to an eight-year low on March 15, is close to matching the 22 per cent fall last year as nine in every 10 China equity funds suffered losses in the last quarter.

The Omicron outbreak and citywide lockdowns in Shanghai and elsewhere have made China’s 5.5 per cent growth target look “illusionary if not delusional”, according to research firm Alpine Macro. That is challenging strategists at Goldman Sachs, Credit Suisse and China International Capital Corporation, who have either upgraded the market or called the turnaround in the past four months.

05:59

How Covid shut down Shanghai

“I’ll be surprised if we hit the March lows again, but we are not out of the woods yet,” said Kiran Nandra, head of emerging-market equities at Pictet Asset Management. “We will need to see a bit more concrete signals. Even signalling on Covid-induced lockdowns would go a huge way to lower the risk premium.”

The People’s Bank of China (PBOC), China’s central bank, on Friday lowered the reserve-requirement ratio (RRR) for banks by only 25 basis points, the smallest cut in history, versus calls for 50 or more. It suggests the market misread concerns among policymakers about the spillover effects of global inflation and impending US rate increases.

The RRR cut, which unleashes 530 billion yuan (US$83.2 billion) of liquidity, generates “too small and too late” savings to spur a cut in lending rate, Goldman Sachs economists said in a note on April 16. It no longer expects the PBOC to cut policy rate or deliver further RRR cuts in its baseline scenario.