Date
25 November 2017
Central bank chief Zhou Xiaochuan insists that China is maintaining a prudent monetary policy, but new loan growth, M2 expansion and the recent interest rate cut all point to a changed policy stance. Photo: Bloomberg
Central bank chief Zhou Xiaochuan insists that China is maintaining a prudent monetary policy, but new loan growth, M2 expansion and the recent interest rate cut all point to a changed policy stance. Photo: Bloomberg

Where to invest amid a low-profile monetary easing in China

Financial stocks rallied over 4 percent in Shanghai on Thursday after Beijing said it would allow local governments swap 1 trillion yuan (US$160 billion) in debt for bonds. The surge helped the Shanghai Composite Index gain rise 1.78 percent to close at 3,349 points. 

Meanwhile, the central government is poised to further ease monetary policy in the wake of recent gloomy economic data. China’s M2, a broad-based measure of money supply, and new loan supply both trended upward in February. That indicates the government has already taken action to stem slowing economic growth.

Recent data on consumption investment and added value in the industrial sector all appear to be disappointing, again stoking market speculation that there will be further monetary easing.

M2 money supply in February rose 12.5 percent to 125.74 trillion yuan from a year ago, compared with January’s 10.8 percent growth. Outstanding loans increased 14.3 percent year on year to 84.72 trillion yuan in February, up 0.4 percentage point from the previous month.

However, the People’s Bank of China dismissed market rumors about monetary easing. Governor Zhou Xiaochuan said in a recent press conference that the nation’s money supply growth was “appropriate” and the central bank will stick to its “prudent policy stance”.

Nevertheless, new loan growth, M2 expansion and the recent interest rate cut all point to a changed policy stance, or at least towards a relaxed policy direction.

Historical statistics show that the mainland stock market is closely linked with the monetary policy direction. Last year, M2 growth moderated but the stock market soared with the help of the Shanghai-Hong Kong Stock Connect and a rate cut in November.

Therefore, the equity market outlook remains positive thanks to various monetary easing measures and the forthcoming stock linkage between Shenzhen and Hong Kong.

Also, Zhou said the government will deepen financial reform this year. The long-awaited insurance plan to protect bank depositors will be rolled out in the first half of this year, and the government will free up the interest rate cap on bank deposits this year.

All these market reforms will benefit the nation’s financial sector, and mainland banks in particular, which outperformed on Thursday.

The government is also considering a diversified investment scheme for the pension fund, and the draft plan will be submitted to top leaders for approval in the second half of this year, according to the human resources and social security minister. Introduction of long-term investors like the pension fund into the stock market will benefit blue-chip plays.

Currently, the National Council for Social Security Fund (SSF) holds shares in East Money Information Co. (300059.CN), BesTV New Media (600637.CN) and Chengdu B-Ray Media (600880.CN). East Money Information has soared from below 3 yuan to 47 yuan, while the other two stocks have more than doubled in the last two years.

The national pension fund has posted a pretty impressive investment track record. That could offer some good insight for retail investors.

This article appeared in the Hong Kong Economic Journal on March 13. 

Translation by Julie Zhu

[Chinese version中文版]

– Contact us at [email protected]

JZ/JP/CG

a columnist at the Hong Kong Economic Journal

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