China Cuts Interest Rate as Growth Risks Worsen With Omicron
Comment of the Day

January 17 2022

Commentary by Eoin Treacy

China Cuts Interest Rate as Growth Risks Worsen With Omicron

This article from Bloomberg may be of interest to subscribers. Here is a section:

“Consumption remains the weakest link in China’s growth story at the moment and that will by and large continue for much of this year,” said Louis Kuijs, head of Asia economics at Oxford Economics. “We think Beijing has a bottom line of around 5%. As is the case at the moment, if growth is weaker than that, they’d feel strongly motivated to pursue more policy easing.”

Economists expect more policy action from the PBOC in coming months. Goldman Sachs Group Inc. said there’s a possibility the central bank will allow banks to lower the five-year loan prime rate, a reference for mortgages, on Thursday. The one-year rate was already cut in December. Economists at Australia & New Zealand Banking Group and BNP Paribas see the likelihood of further reductions in the reserve requirement ratio for banks.   

Eoin Treacy's view

The big question for liquidity dependent stocks is where the next big source of liquidity is going to come from. The US government is struggling to get additional spending measures passed. The Fed expects to be done with QE tapering in a couple of months and both Europe and Japan are not significantly increasing their programs. The potential for China to do more to support flagging growth is one of the few realistic possibilities for ample additional liquidity in the near term.

News headlines about the property developer sector and property prices are growing increasingly dire. The China high yield Index also made a new low on Friday.

Nevertheless, the CSI 300 Real Estate Index rebounded today from the region of the trend mean. Together with the fact several US listed Chinese tech companies have at least stopped falling, it suggests there is a growing chance the market will rebound strongly following additional measures to support growth.

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