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China’s surprise dovish tilt last week is only a prelude to an interest-rate cut as economic growth begins to falter, according to consensus-defying calls from UBS Asset Management and Citic Securities Co.
The central bank is likely to lower its benchmark lending rate by year-end to support small and medium-sized companies, said Hayden Briscoe, head of fixed income for Asia Pacific at UBS Asset, without specifying the amount of the reduction. That should help push down the nation’s 10-year bond yields by as much as 100 basis points to a record low, he said.
“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 in an interview. “We will see more easing measures later this year, and in late 2022, we will see the real economy pick up.”
The People’s Bank of China said Friday it would trim the reserve requirement ratio by 0.5 percentage point for most banks, freeing up about 1 trillion yuan ($155 billion) of long-term liquidity into the economy. China’s unexpected flip to an easing stance spooked many investors on concern its rebound from the coronavirus pandemic may be faltering.
Read more: China’s Slowing V-Shaped Economic Recovery Sends Global Warning
China’s bonds rallied after the reserve-ratio cut, with the 10-year yield dropping seven basis points on Monday to 2.94%, the lowest level in almost a year.
The slide in bond yields will help narrow the yuan’s interest-rate premium over the dollar and may ease pressure on the yuan to appreciate, UBS Asset’s Briscoe said. He manages a number of funds including a China Fixed Income fund that has returned 13% over the past year, beating 83% of its peers, according to data compiled by Bloomberg.
The loan prime rate, which is the base rate for new bank loans, will likely be lowered as Beijing seeks to reduce funding costs in the real economy, Ming Ming, head of fixed-income research at Citic Securities in Beijing, wrote in a research note Tuesday.
Last week’s reserve ratio cut will send the overall borrowing costs lower for lenders, allowing them to charge less for loans to corporates, and that will lead to a lower loan prime rate, Ming said.
Fidelity Skeptical
China’s newfound dovish posture has added to global concerns over the rapid spread of the Delta variant of the coronavirus and has chipped away at faith in the global recovery. UBS’s forecast for a rate cut though is a far cry for consensus, with other analysts expecting the PBOC to stand pat on its rates while providing more liquidity.
“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 Ltd. 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 the same day.
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July 13, 2021 at 10:28AM
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China to Cut Rates, Sending Yields to Record Low, Says UBS Asset - Bloomberg
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