China to cut interest rate by end of year, UBS analyst clashes with broader consensus
- People’s Bank of China is likely to lower its benchmark lending rate by the end of the year, according to Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset Management
- Most fund managers do not expect China to go as far as that in its easing policy after last week trimming the reserve requirement ratio by 0.5 percentage points for most banks
China’s surprise dovish tilt last week is only a prelude to an interest-rate cut as economic growth begins to slow rapidly, according to UBS Asset Management, a prediction that clashes with the broader consensus.
The People’s Bank of China (PBOC) is likely to lower its benchmark lending rate by the end of the year to support small and medium-sized companies, a move that will potentially send 10-year bond yields to a record low, said Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset Management.
That is a contrarian call as most fund managers do not expect China to go as far as that in its easing policy.
We will see more easing measures later this year, and in late 2022, we will see the real economy pick up
“The PBOC has transitioned from a neutral stance to start an easing cycle, and this cycle has further to go,” Hong Kong-based Briscoe said.
“We will see more easing measures later this year, and in late 2022, we will see the real economy pick up.”
The reduction was flagged a few days previously, when the State Council hinted that policymakers would make more liquidity available so that banks could lend to smaller firms hurt by rising costs.
China’s unexpected flip to an easing stance spooked many investors as it raised speculation the country’s rebound from the coronavirus pandemic may be faltering.
The new-found dovish posture added to global concerns over the rapid spread of the Delta variant of the virus and has chipped away at faith in the global recovery.
China’s bonds rallied after the reserve-ratio cut, with the 10-year yield dropping seven basis points on Monday to 2.94 per cent, the lowest level in almost a year.
The yield will slide at least 25 basis points within the next three months, and may eventually decline as much as 100 basis points to a record low if the PBOC ends up cutting its benchmark rate, UBS Asset’s Briscoe said.
A slide in Chinese bond yields would help narrow the yuan’s interest-rate premium over the US dollar and may ease pressure on the yuan to appreciate, he said.
Briscoe manages a number of funds at UBS Asset including a China Fixed Income fund that has returned 13 per cent over the past year, beating 83 per cent of its peers, according to data compiled by Bloomberg.
If we see the economic situation change or more Covid-19 resurgence in China, we may potentially see a rate cut but for now the evidence doesn’t seem to suggest that
UBS’s forecast for a rate cut is far from mainstream as most economists do not expect Beijing to make such a move any time soon.
“If we see the economic situation change or more Covid-19 resurgence in China, we may potentially see a rate cut but for now the evidence doesn’t seem to suggest that,” said Morgan Lau, a fixed-income portfolio manager at Fidelity International in Hong Kong.
Monetary easing that is not targeted could induce inflation and create a larger wealth gap, Lau said.
China’s benchmark interest rate may also be becoming less important to the PBOC as time goes on. In recent years, the central bank has adopted a more flexible policy rate – the cost of cash injected with its medium-term lending facility – to adjust borrowing costs. It lowered that gauge twice last year to help steer the economy out of the pandemic.
Investors are now looking ahead to some key data points in the coming week to get a better sense on the health of China’s recovery.
The nation will release its gross domestic product report for the second quarter on Thursday, along with retail sales and industrial production numbers.
