China looks set to keep a loose monetary policy. Premier Li Keqiang said in the government work report that Beijing has lowered various targets for economic growth. For example, the target for GDP growth is now 7 percent, import and export value is expected to grow 6 percent, retail sales by 13 percent, and fixed-assets investment by 15 percent.
All these new targets indicate that the government has less confidence in the nation’s economic growth outlook.
As noted by Mizuho Securities, China still faces great challenge to achieve a 7 percent annual growth, given the sluggish external demand and deep-rooted structural problems in its economy. Therefore, China may resort to additional monetary easing measures in order to achieve reasonable economic growth. The People’s Bank of China is expected to cut interest rates twice and lower banks’ reserve requirement ratio (RRR) four more times at least.
Meanwhile, ANZ pointed out that there is little chance to see across-the-board monetary easing in China. However, the central bank may continue to cut interest rates by 25 basis points and RRR by 100 basis points this year in a bid to arrest the economic slowdown, deflationary risk and capital outflow.
However, improving economic data in the United States, particularly its strong employment figures, has stoked market speculation that the US Federal Reserve will opt for an earlier interest rate hike.
The US Labor Department said non-farm payrolls increased by 295,000 in February, compared with 239,000 in the previous month, beating market expectation of 240,000. The unemployment rate also touched a seven-year low of 5.5 percent, better than the 5.6 percent market expected.
That has changed market expectation of the timetable for a rate hike. Currently, 21 percent expect an interest rate hike in June, up from 16 percent earlier, and as much as 63 percent anticipate a rate hike in September, according to data from interest rate futures.
The Fed is scheduled to hold a two-day meeting on March 17. The market is closely watching whether the Fed will revise the wording in its statement, such as deleting the phrase “keep patience”.
The Hong Kong stock market has always looked to either the US or China market for cues. Currently, the US may accelerate the timing of the rate hike, while China may further cut interest rates. That will definitely put Hong Kong market in a dilemma.
The abrupt interest rate cut China adopted earlier has very limited impact on H-share trading. Therefore, an earlier-than-expected US rate hike might outweigh any possible interest rate cut in China. The Hong Kong market would face greater downside risk in the coming week.
This article was published in the Hong Kong Economic Journal on March 9. [Chinese version中文版]
Translation by Julie Zhu
– Contact us at [email protected]