China’s central bank is likely to slash interest rates once or twice and lower the reserve requirement ratio (RRR) two times in the coming year, CLSA said Monday.
However, the first rate cut will not take place until the first quarter next year given a highly leveraged stock market.
Altogether, interest rates may come down 50-60 basis points and RRR 100 basis points, Francis Cheung, managing director of China-Hong Kong Strategy at CLSA, said.
“I think the interest rate cut that we have been expecting has been delayed mainly because the central bank is worried about money going into the stock market,” Cheung said.
The People’s Bank of China does not want to lower interest rates so soon after it cut benchmark rates in November because such a move could drive savers into stocks.
Cheung expects the A-share rally to continue, saying a correction is unlikely until at least March.
But an interest rate cut is necessary to bolster a weak property sector and prevent it from dragging on the economy, he said.
Together with easing measures in the property market, housing prices should stabilize in the first quarter next year.
The rate cuts will come with fiscal stimulus, such as infrastructure spending, to boost the economy, he said.
Fiscal stimulus was a big theme during the Central Economic Work Conference last week.
Although interest rate cuts help stabilize the stock market and prevent downside risks, Cheung said it’s “really hard for interest rates to drive the economy”.
“That has to come with fiscal stimulus,” he said.
Cheung said southbound investment in Shanghai-Hong Kong Stock Connect has been disappointing largely because of the 500,000 yuan (US$80,800) minimum trading account requirement for mainland retail investors.
Also, he said Hong Kong has missed out on a big rally by Asian equities.
Cheung expects the trading account threshold to be scrapped next year.
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