China’s latest interest rate cut may have limited boost for the economy.
The official Purchasing Managers Index has improved to 49.9 from the January level, but still below the benchmark 50 expansion line. That indicates the manufacturing sector is still contracting.
Also, the housing market remains sluggish, with the average housing transaction price in 100 major cities down 3.84 percent in February from a year earlier.
However, there is no need to worry too much. Historical experience shows that counter-cyclical measures by the government may at least mitigate some issues even they fail to reverse the broad economic trends.
A rate cut may not boost the domestic manufacturing and property sectors immediately, but it will reduce borrowing costs for companies. The loan prime rate (LPR) dropped 21 basis points to 5.3 percent on Monday. That will benefit companies.
The direct benefit for stock markets depends on whether the rate cut will lure more money into the market. Some mainland brokerages have cut their benchmark interest rate for margin trading. Citic Securities (600030.CN) lowered its one-year margin trading rate to 8.35 percent from March 2. These measures will boost stock trading volume and thus benefit the market.
Monetary easing is set to continue this year, and investors are focusing on policy-driven stocks ahead of the twin meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference.
Environmental protection is likely to be a hot topic in the twin sessions following the huge public discussion on a hard-hitting documentary about China’s air pollution woes by former state television reporter Chai Jing.
Fujian Longking Co. Ltd. (600388.CN) and Zhejiang Feida Environmental Science & Technology Co. Ltd. (600526.CN) shot to their daily upper limit, while Tianjin Capital Environmental Protection Group Co. Ltd. (600874.CN) and Keda Clean Energy Co. (600499.CN) rallied over 7 percent.
Other hot topics include new economic norms, the “One Belt, One Road” strategy, employment, pension, healthcare and education.
Zong Qinghou, founder and chairman of Chinese beverage giant Wahaha, has proposed tax breaks for mainland companies, which pay around 40 to 50 percent tax. Lowering taxes, financing costs and even land prices for industrial use will help restore growth in the real economy.
These topics are all going to attract wide public attention and discussion during the twin sessions, which may lead to related policy moves. The most imminent reform is in the power sector, and this has already been approved by the central government.
The power sector reform will benefit not only power generators but also private players eager to tap into the sector.
Datang International Power Generation Co. (601991.CN) and Huadian Power International Corp. (600027.CN) both gained 4 percent on Monday. Further gains are expected to follow the roll-out of the reform plan.
This article appeared in the Hong Kong Economic Journal on March 3.
Translation by Julie Zhu
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