At the same time, the PBOC announced a widening of the band within which banks must lend funds from 10 per cent above the benchmark rate to 20 per cent. PBOC guidance for five-year savings rates was also removed.The timing of the move surprised the markets, but the central bank’s actions are consistent with the general direction of travel in China.
China’s government is pro-actively re-engineering a transition of the economy towards consumption-led growth from export and investment led growth. This process is slowing the overall economy and putting downward pressure on inflation.
The new growth model also requires brand new policy levers to manage the economy, particularly a greater reliance on interest rates.
The PBOC’s latest policy moves achieve two things: First, they help the economy though its economic transition. Second, they advance the objective of interest rate liberalisation. The latter is ultimately far more important than the former, in our view.
The Chinese bond market is destined to be the main transmission mechanism for PBOC rate changes and interest rate management is in turn going to be China’s principal instrument of macroeconomic policy in the future (just as it is in most developed economies).
That is why interest rate liberalisation and the development of the Chinese bond market, including opening of the market to foreign investors, is so key.
In other Chinese news, the pace of slowdown in the Chinese property market slowed in October and there are signs that a recovery may soon take root.
House prices are declining at progressively low rates. In October, house prices declined by 0.83 per cent versus -1.03 per cent in September, based on the NBS 70 city survey. Another survey, the Soufun 100-city survey, shows similar dynamics.
Land prices are also picking up strongly, while housing starts and property investments are showing signs of stabilising.
We think the broad macroeconomic environment – interest rate liberalisation, curtailment of excess credit creation, and a slowing economy – have weighed on the housing sector for some time.
However, housing cycles are shorter in China than elsewhere due to the smaller role of mortgage financing and both central and local governments have extended various measures to support the housing market during this transition period, including easier criteria for applying for mortgages. The latest PBOC rate cut will also support the sector.
Meanwhile, the Russian economy continues to show considerably more robustness than the behaviour of Russian asset prices would seem to imply.
Russian bonds, stocks and the currency have taken a beating this year on the back of lower oil prices, Western sanctions and continuing unrest in eastern Ukraine.
However, recent growth numbers beat expectations significantly and fresh data on retail sales released last week further underlined Russia’s economic resilience, at least relative to expectations in the market.
Retail sales for September rose 1.7 per cent versus 1.2 per cent expected, while real wages rose at a rate of 0.3 per cent year-on-year versus an expectation of a 0.9 per cent year-on-year decline. Fixed asset investment declined 2.9 per cent year-on-year versus -3.5 per cent year-on-year expected. Industrial production rose 2.9 per cent year-on-year versus -1.5 per cent year-on-year expected.
Unsurprisingly, given the decline in the RUB, weekly inflation picked up 0.1 per cent to 0.3 per cent on the week, which suggests that the Russian central bank could yet again raise rates.
The resilience of the Russian economy compared to investor confidence and the insistence of the Russian central bank to do what it takes to keep inflation under control suggests that there may be considerable value in Russian assets.
After all, investing is not about allocating resources to only good or popular countries. Rather, it is about allocating to countries, where asset prices and the true underlying risks have moved out of line with one another.
Jan Dehn is head of research at Ashmore. The views expressed here are his own.
