Moneycontrol
Last Updated : Nov 24, 2014 04:44 PM IST | Source: CNBC-TV18

Chinese rate cut may spur global liquidity: Shaun Rein

China cut interest rates unexpectedly on Friday, stepping up a campaign to prop up growth in the world's second-largest economy as it heads towards its slowest growth in nearly a quarter century.


Shaun Rein, China Mkt Research Group  in an interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy said rate cut done by the People's Bank of Chian doesn’t necessarily mean there will be a massive quantitative easing but could be targeted easing.

It is possible that there could be reserve ratio cut in the next quarter, he adds.

According to him rate cut in China could mean other regions like EU might too reduce some rates which might lead to fund flows into equities, so one could see strength into Asian equities like in Hang Seng or Hong Kong over the next day or two but the government  may  not do too much because the credit problems still persists.

The Chinese government is in a difficult position right not to get its economy moving which is why it has cut rates but at the same time the unemployment numbers are still strong, salaries continue to go up and there are still very real weakness in non-performing loans.

China cut interest rates unexpectedly on Friday, stepping up a campaign to prop up growth in the world's second-largest economy as it heads towards its slowest growth in nearly a quarter century.

Investors need to be cautious on China but there is no cause to overly panic, he says.

He does not think this could lead to growth rate in China picking up significantly to 8-10 percent a year like it was in the last decade but feels it is a good thing that the Chinese government is allowing a slowdown and pushing towards economic reforms.  


Below is the transcript of Shaun Rein's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: What sense you are getting about the Chinese rate cut? Is this the first of a series of rate cuts or more rate cuts at least that maybe expected? Is this is a u-turn in the People’ Bank of China’s (PBoC) policy?

A: The key point the last time you had me on a few months ago, I said that the economy here is a lot weaker than most people thought and that’s still true. Industrial profit margins are dropping, inflation is down below 2 percent and so the government is in a difficult position. It need to try to get the economy moving again which is why it did the rate cut but at the same time unemployment numbers are still very strong, salaries are still continuing to go up and there is still very real weakness in non-performing loans.

Therefore, I do not expect to see massive quantitative easing anytime in the next month or two but I still think there is going to be targeted easing. So, it’s going to be easier for some of the larger banks to dole out money into the market rates to loans. I think it is very possible; you are going to have reserve ratio cut at some point in the next quarter. So investors need to be cautious on China but I wouldn’t be overly panic. There is weakness but unemployment numbers are still very strong.

Sonia: What does China’s rate cut mean for the global economy?

A: The rate cut means that you are going to see other countries or other regions like the European Union might reduce some of the rate cuts so it might spur a lot of funds flowing into equity markets, so I expect that you are going to see some strength in Asian equities, in Hang Seng in Hong Kong over the next day or two. I think it is good for the equity market but I do not think the government is going to do too much because of concerns about credit problems that are very real in the country in China today.

Latha: Do you expect growth to pickup anytime soon in China? Is that the market’s belief at least?

A: The reality is no. I do not see the economy here growing to 8-10 percent a year like it has done the last three decade but that is a good thing.

I think overall the government by allowing slowdown is actually doing the right thing and pushing towards economic reform. There are two parts to that – (1) you were starting at such a low base in the last three decades, growth has been high but the promise that too much of growth was based on export oriented and that’s not how they think. The government is trying to switch more towards more consumption and services. I had a new book that came out two weeks ago called 'The End of Copycat China', which looks at the shift and the government pushing up services and innovation.

Latha: Should this rate cut fire up metal stocks if the intention is to generate different kind of growth?

A: In the long-term it’s not going to be the major difference on growth. It’s going to increase stock because you got the hedge funds, there are investing based on sentiment rather than economic numbers.

Sonia: You did mention that you expect funds to flow back into equity markets or rather more funds into equity markets. How do you read the India versus China argument because India has been outperforming so far?

A: I am not an expert on India but I do think India is going to remain very strong but couple of things are important from investors’ scenario – in New York last week there was HSBC Investor Conference and over there everybody was talking about the stock connect; where now mainland Chinese investors invest in Hong Kong stock exchange and more importantly foreigners can invest in the Chinese stocks.

So, there has been a lot of interest in there because a lot of the hedge funds wanted to get exposure to the Chinese A-shares. I think the equity markets are going to go up because of stock connect, the second thing is that its going to go up because of the rates, liquidity easing and that’s is getting a lot of people interested in China again but I wouldn’t say its an either or. I think India could be very well and China can do very well, but I am not an expert on India like I am on China.

First Published on Nov 24, 2014 08:48 am
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