China : PBoC disappoints market with 10 bps rate cut

By Peter Garnry, Head of Equity Strategy at Saxo

Expectations for Chinese stimulus have clearly been too high and the PBoC’s 10 basis points rate cut was another disappointment. Chinese equities will continue to suffer relative to other countries benefitting from changing global supply chains and the government will be more constrained in its stimulus policies compared to past cycles.

Chinese equities have rallied in June based on rising expectations that the Chinese government will soon do a lot more stimulus to backstop demand and ensure higher economic activity. However, PBoC’s 10 basis points rate cuts across its key benchmark rates were lower than the 15 basis points expected sending Chinese equities lower and denting general risk sentiment across equity and commodity markets.

Since the peak of the weakest technology segments in February 2021, the larger and more mature part of the technology sector peaked later in November 2021, Chinese equities have underperformed countries such as Mexico, South Korea, India, Malaysia, Japan, Indonesia, and Vietnam. These countries are those we find gain the most from fragmenting supply chains and de-risking of Chinese manufacturing. De-risking of supply chains, more strict Covid-19 policies, clampdown on the private sector, and a real estate sector in distress are all factors behind the Chinese underperformance. The fragmentation game that we described in our Q2 Quarterly Outlook is a long-term trend that will continue to play out in favour of those countries mentioned above.

Our view is that China’s debt overleveraged economy has created constraints on the government’s ability to easily reignite economic growth and that the country will go through a prolonged adjustment reducing debt leverage and reducing reliance on exports to drive the economy.

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