Mission 2015: China’s quest for sustainable economic expansion

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• Mission 2015: maintaining stable economic growth is a major task for the Chinese government this year.
• Proactive fiscal policy and prudent monetary policy will be implemented to further support the stock and bond market.

China is entering a new norm with a more sustainable and stabilised economic growth rate – it has been lowered to 7% for 2015, switching growth from quantity to quality. Although the anti-corruption campaign has seriously affected consumption, the policy acceleration will provide strong support to consumption and make it stable this year. Besides benefiting from a sustained economic recovery overseas, we expect exports to grow steadily at 10%. Additionally, successful landing of the “Belt and Road” and Public-Private-Partnership projects will benefit the infrastructure sector.

This year’s Central Economic Working Conference put “maintaining stable growth” as the first major task for 2015. “Proactive fiscal policy and prudent monetary policy needs to be more balanced between tightening and loosening” imply 1) implementing the structural tax reduction to promote the development of enterprises; 2) maintaining the proper scale of deficit for increasing investment in real economy. With several themes and reform policy drive, the focus will be financial reforms, state-owned enterprise reforms, Belt and Road, and emerging industries (such as internet finance, mobile health, and aftermarket of high speed rail). In terms of monetary policy, PBoC may cut interest rates and Required Reserve Ratio (RRR) again in order to support the reforms. In addition, the central bank will continue with further interest rate liberalisation by introducing a wider floating range for the deposit rate and deposit insurance scheme.

For the equity market, we believe the declining interest rate cycle will further support performance. A-shares will continue to rise as alternative asset classes for local investors have become unfavourable, triggering a return of the retail investor to the A share market. In addition, introduction of more foreign investors into A-shares through the connection of Shanghai and Hong-Kong markets and Renminbi Qualified Foreign Institutional Investors (RQFII) expansion will support the rally.

The monetary easing will support performance of Chinese bonds over the year. However, the People’s Bank of China will baulk at pumping more liquidity into the market at the beginning of 2015 so as not to further fuel the already rallying A-shares equity market. We anticipate easing to happen later in the year. Credit defaults might increase, especially as the Chinese clearing agency announced in December that local bonds rated lower than the highest AAA grade are too risky to be used as collateral for short-term loans. Credit default should increase as a result. This risk is manageable for China, and good news for the liberalisation process and credit risk pricing, but investors will have to expect volatility in the bond market. As a result, we expect a flight towards quality and better performance for higher graded bonds.

In terms of currency, we expect the RMB to appreciate mildly in 2015. As China accelerates the RMB internationalisation process, we anticipate the PBoC will maintain a steady RMB in order to keep the credibility of the currency and gain a larger chance to enter the IMF SDR basket which is to be evaluated in 2015.

The full article is in the Q1 2015 edition of Expert Eye on China, available here: http://publicationsystem.secure-zone.net/v2/index.jsp?id=2514/3042/9643&lng=en

Emmanuelle Wilbrod

Investment Specialist – BNP Paribas Investment Partners Asia Ltd

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