In the last five weeks sentiment has improved in China and there is no longer much talk about hard landings, according to Chris Tang, CIO of Marco Polo Pure Asset Management.
Liquidity and policy factors have superseded global and domestic fundamentals. It’s China’s "short term [period] of honey", she believes.
Pointing out that People's Bank of China (PBoC) bond interest rates have been dropping lately, she says authorities have begun to relax their liquidity policy and are starting to reverse tightening measures which have been in place for over a year.
With pork prices having fallen 30% and non food inflation also lower, she expects fourth quarter annualised inflation this year of 4.5% (from 6.5%), which she says will represent a turning point.
The next step, she predicts, is for bank reserve ratios to be cut in mid-January next year from the present all-time high of 21.5%, estimating that a 0.5% cut would release Rmb300 billion ($47.3 billion) of further liquidity into the markets.
Some of that she thinks will go into direct investment such as domestic private equity, and the remainder into the stock market.
Another step she is anticipating is an increase in bank loan quotas to Rmb8 trillion, from Rmb7.5 trillion.
“This year mid-sized conservative entrepreneurs didn’t get the finance they needed. Lending has been strong due to trust companies and illegal lending, but a lot has gone to inefficient entrepreneurs, property developers and toy manufacturers,” she says.
Nevertheless, she does not foresee a problem with the illegal lending market blowing up, since she perceives that they have lent against high levels of collateral. Will an interest rate cut, then, logically follow?
“I’m not sure I’d like them to cut interest rates,” she says, “because in order to maintain bank loan-to-deposit ratios, saving rates need to be kept attractive to depositors.”
She thinks that likely property price falls of 20% to 30% in tier one cities such as Beijing and Shanghai have been accepted by the government.
“I remain negative on property stocks. The secondary property resale market is basically dead in some major cities.”