19 November 2018
Fed chief Janet Yellen prefers a “loosening” rather than a “tightening” approach. Photo: Xinhua
Fed chief Janet Yellen prefers a “loosening” rather than a “tightening” approach. Photo: Xinhua

Yellen’s dovish remarks buoy equity markets

Global equity markets rallied following dovish comments from Federal Reserve chairwoman Janet Yellen on Tuesday.

Short-sellers rushed to wind up their positions, and fund managers bought more shares.

The Hang Seng Index soared 437 points to close at 20,803 points on Wednesday.

Yellen said equities and the oil price slumped after the Fed lift-off in December last year, and economies overseas were weaker than expected.

Currency devaluations and lower corporate earnings estimates have suppressed US economic growth.

Yellen hinted that the Fed would rather take a “loosening” than a “tightening” approach since there are so many uncertainties.

She said inflation appears to be stabilizing, but some leading inflation indicators are slipping.

Hence, it might take a longer time to reach the targeted 2 percent inflation.

That means the Fed might keep the loose monetary policy for a longer time than expected.

Yellen said leading economic indicators have shown a mixed picture.

Currently, private consumption remains the key driver of US economic growth, while company investment and net imports contributed 0.2 percent and negative 0.53 percent to GDP growth.

However, the job market and wage growth are critical factors shaping the future consumer spending picture.

The US unemployment rate has dropped to 4.9 percent, but there are still as many as six million people who are working on non-full-time jobs not out of their own choice.

In the past, the number of part-time workers usually stayed around four million at such an unemployment rate.

There are more and more people struggling to find full-time jobs all over the world after the financial crisis.

It’s the same in Hong Kong. Many middle-aged people work part-time, and lower wage growth and limited sense of job security would affect consumption and housing demand.

In this case, investors should not hold too many pre-set views on the financial market. The dollar won’t stay strong forever.

In the meantime, Industrial & Commercial Bank of China (01398.HK) posted a moderate 0.5 percent growth in net profit last year.

Bank of Communications (03328.HK) said 55.4 percent of its new loans were lent for individual consumption and mortgage, which offer higher margins and have lower default rates.

Nevertheless, overdue loans continue to worsen; loans overdue for no more 90 days jumped by 78 percent to 169.9 billion yuan (US$26.28 billion).

All these could lead to new bad loans and spike impairment.

Last year, ICBC posted a 53 percent jump on bad loan losses.

As a result, the bank decided to cut its dividend by 8.7 percent to HK$0.2333 per share. This marks the first dividend reduction since its listing in 2006.

Manufacturing as well as retail and wholesale loans account for 32.3 percent of ICBC’s total loans last year.

The non-performing loan (NPL) ratio of these two types of loans reached 3.43 percent and 6.6 percent respectively.

As a result, the bank is set to post profit decline this year unless the manufacturing sector in the mainland shows a marked improvement.

China Construction Bank (00939.HK) and Bank of China (03988.HK) also cut their dividends by 8.9 percent and 7.9 percent respectively.

China’s three largest banks all have slashed their dividend payout ratio, a sign that they may increase bad loan write-offs this year.

On the other hand, blue-chip consumer staples have outperformed the benchmark.

China Mengniu Diary (02319.HK), Tingyi Cayman Islands Holding (00322.HK), Want Want China Holdings (00151.HK) and Hengan International Group (01044.HK) posted rallies of 5 to 11 percent as investors rushed to add positions.

This article appeared in the Hong Kong Economic Journal on March 31.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist of the Hong Kong Economic Journal

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