The People’s Bank of China has announced a 1 percentage point cut in banks’reserve requirement ratio, and the market has responded more positively than it did to multiple cuts last year. More importantly, the renminbi remained stable.
This time, the US Federal Reserve’s stance has made the biggest difference.
Last year, the Fed was bent on raising rates by 0.25 percent each quarter. The quantitive tightening was reaching the limit of US$50 billion each month.
As a result, China found its stock market and currency under pressure every time the PBoC eased the monetary policy.
But the US equity market has posted a notable correction in recent months, and some economic indicators like the purchasing managers’ index have shown signs of weakening.
Fed Chairman Jerome Powell said in November that he considered the central bank’s benchmark interest rate to be near a neutral level.
The Dow Jones Industrial Average rallied over 700 points following strong job data in the United States last Friday. The 10-year US Treasury yield returned to above 2.6 percent. That’s a reminder that we should keep a close eye on the US monetary policy.
My biggest concern this year is an excessively strong US dollar, though almost all leading banks are projecting a weaker dollar, citing the European Central Bank’s halting of its quantitative easing program and the fact that emerging markets are outpacing the US in economic growth.
The dollar index has been hovering in the range of 95.5 and 97. I will feel more comfortable with emerging market equities if the dollar index retreats to below 95.
The new round of US-China trade talks being held in Beijing is a positive development. Such middle-level negotiations are necessary, though substantial progress may be unlikely.
It is said that US President Donald Trump is likely to hold talks with China’s Vice President Wang Qishan at the World Economic Forum later this month.
March is a critical month: we have to watch carefully three major events.
First, what will have happened to the US-China trade talks by early March? Trump has been upbeat about the progress of the talks, but he could change his rhetoric anytime.
Second, the deadline for Brexit on March 29. There is a growing sentiment in the European Union to help the United Kingdom avoid a no-deal Brexit scenario.
Third, the Fed’s rate move in March will offer a clue as to whether it will maintain or change its course in hiking interest rates.
This article appeared in the Hong Kong Economic Journal on Jan 8
Translation by Julie Zhu
[Chinese version 中文版]
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