- Citi economists said: “We have long debated our view that China can be a key growth hedge this year – if anything, recent global tensions in the banking sector may have reinforced that thesis.”
- The People’s Bank of China’s decision to cut its required reserve ratio shows “a confirmation of policy support amid global volatilities,” Citi economists wrote.
Aerial view of shipping containers standing stacked at Yangshan Deepwater Port, the world’s largest automated container terminal, in Shanghai, China, 21 May 2021.
vcg | Visual China Group | Getty Images
The recent turmoil surrounding the banking sectors in the US and Europe has highlighted China as a “relatively safe haven” this year, economists at Citi said in a note on Thursday.
Investor sentiment towards China has been weighed on over the past year by Covid controls and regulatory uncertainty. Now those controls have ended and policymakers have sent clearer signals to regulate.
“Activity momentum could continue to pick up from here, with auto sales improving and home sales stabilizing,” Citi economists said.
They said China could be an outlier among its global peers when it comes to accelerating expansion, giving the country “hedges” for growth while the US and European economies face an increased risk of financial disruption.
“We have long debated our view that China can be a key growth hedge this year — if anything, recent global banking crises may have strengthened that thesis,” said a team led by Citi’s China chief economist Xiangrong Yu.
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“China could at least be a relatively ‘safe haven’ given its growth premium, financial solidity, political discipline and new cycle of political economy,” said Citi economists.
They wrote that recent actions, such as the People’s Bank of China’s decision to cut its reserve requirement ratio, showed “a confirmation of policy support amid global volatilities.”
The RRR is a measure of how much cash banks in China must hold on hand. The PBOC said it would cut the ratio by 25 basis points for most banks, effective March 27. Since the pandemic began, mainland China has maintained relatively loose monetary policy without announcing any major stimulus packages — such as large cash issuance to consumers.
“Perhaps the PBoC has learned lessons from what the US has been through in recent years and has been wary of easing even during the pandemic era and may quickly switch to a wait-and-see mode once growth gets back on track,” so the economists at Citi wrote.
They also noted that China’s government reshuffle earlier this month is an example of its efforts to mitigate financial risks.
“This year, Beijing is determined to contain local government debt risks, for which we believe it has sufficient tools,” the economists wrote.
With China’s GDP expected to show relatively outstanding growth this year, economists also see a positive side for its currency — Citi expects the onshore yuan to rise to 6.6 against the US dollar as early as September. That would take the currency to its strongest level since April last year.
“With the unintended and unwelcome aggressive rate hikes abroad, capital inflows into China could resume after trade reopens if the recovery thesis proves true and policy reassessment continues steadily,” Citi economists wrote.
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“We still believe the party of capital inflows to China is not over yet and expect USD/CNY to rise to 6.6 in 6-12 months,” they said.
This view is further supported by a falling greenback: Federal Reserve Chairman Jerome Powell on Wednesday indicated that rate hikes are nearing an end, with the US dollar index falling further to an overnight low of 101.915 on Thursday. The index has fallen about 1.4% for weeks.
The landscape in China is very different from what’s happening in the U.S. and other countries because of rapid rate hikes, Lawrence Lok, chief financial officer of wealth manager Hywin, told CNBC in a phone interview.
Regarding the regulatory developments, he said his firm sees a clear effort by Beijing to improve foreign financial institutions’ ability to participate in the local market.
“Net-net, the regulatory environment is currently positive for the financial sector in China,” Lok said.
“Maybe it’s not so friendly for some sectors like high-tech, but I think [for] in the financial sector we are quite positive,” he said.
Hywin had more than 36,700 active clients and the equivalent of more than $1 billion in assets under management at the end of December.
– CNBC’s Gina Francolla contributed to the report.