China’s central bank cut the country’s reserve requirement ratio (RRR) or the amount of cash that banks must hold as reserves by 100 basis points to 18.5 percent. This has been done to boost liquidity and spur growth in the world’s second biggest economy.
In an interview to CNBC-TV18, Shaun Rein, managing director China Market Research welcomes the move by saying that the Chinese economy is much weaker than is expected. He says the clampdown on corruption is impacting manufacturing to a great extent. He further adds that project approvals are not coming through due to the fear of corruption charges and procurement too is being delayed.
He says the equity market is only trading on expectation of stimulus and will crash anything between 5-20 percent if it doesn’t come through.Below is the edited transcript of Shaun Rein's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: How you read the reserve requirement cut? Investors in some parts are reading it as an indication that probably the economy is worse-off than many people thought which is why there is such a big reserve requirement cut?
A: I have been saying for the last three months, its much more bearish than the rest of the market, the economy is lot weaker than a lot of people think. First, the government has been very serious about pollution reduction, which has impacted some of the capacity of the large manufacturing, steel, cement and like that as well as the corruption crackdown and that is one of the big concern that I have right now.
The correction crackdown is serious, it is widespread and it is needed. There is way too much corruption, but what happened is the whole country sort of in lockdown mode, nobody is willing at the government level to approve new projects, procurement department and state owned enterprises are nervous about buying things because they are worried about being fingered as being corrupt. So even with this reduction in the reserve requirement ratio (RRR) I am not concerned it is going to have as big effect on stimulating economy as people think because people won’t loan out money and people won’t borrow money if they are scared to do business right now.
Sonia: What does the Chinese market need to stimulate the economy and if this growth continues to disappoint then would you expect an additional benchmark rate cut in the next couple of quarters, something that many experts are now talking about?
A: I think what we need to look at is not gross domestic product (GDP) growth but we need to take a look at unemployment and the second reason why I am more concerned about the economy is in the last month urban unemployment has been hovering around 5 percent – that’s really a problem. So the unemployment rate in areas of manufacturing are still fairly strong and you can easily stimulate that by forcing state owned enterprises to do heavy investment; train construction, airport construction and you can get jobs there but the issue is urban unemployment is weak and there aren’t a lot of easy remedies. The government is trying to switch from manufacturing oriented economy more towards one of technology and innovation as I outlined in my new book ‘The End of Copycat China’ but it is not easy to do that. You cannot get companies that are producing things all a sudden to become innovators, so there is definitely going to be some weakness, some problems in the economy over the next three-four months and frankly there are no easy answers on how they stimulate the economy.
Latha: The more short-term point as well we wanted to discuss with you – the clampdown on margin funding or at least curbing the easy money and the permission for short selling. How much of an impact would that have? Is it just one day or one week impact?
A: The margin trend has to be cracked down. If you think about the stock market, it’s crazy right now. It’s been up 15-18 percent in the last two weeks and there is no reason for it. It is not like margins are improving, profitability anything like that - people are trading because they think that there is going to be stimulus. People do not know where the investor money right now, they cannot buy cars. They cannot buy home because of the government restriction. So as soon as the stock market goes up everybody is just piling in. It is quite dangerous right now because what happens if the market drops. The market is boomed which will help improve consumers confidence in the last two-three weeks but it is very dangerous in long-term.
Latha: So you do expect a crash?
A: Not a huge crash but if you see a drop of 5-10 percent or 20 percent, that is not going to hurt the real economy but it is very conceivable that you are going to have ups and downs like that and a lot of people are going to get hurt. What the government needs to do now is they need to ease some of the regulations on buying auto and ease some of the regulations on home purchases. And what they have done just isn’t enough, they have lowered first time home buyers using the state provident fund, they can put down 20 percent rather than 30 percent but I think they need to just ease up the restrictions. Right now there is a lot of money sitting in bank accounts of people and then people just don’t know where to spend because they cannot buy house or car. There is a lot of pent up demand in housing and in autos right now.
Sonia: How does an investor in India read all of this? Will this Chinese stimulus spur global liquidity and benefit some of the other markets?
A: Yes, I think India is going to continue to benefit with some of the infrastructure spending that Chinese investing abroad, India and some of the neighbours can do that. Obviously Pakistan is going to benefit well by the billion dollar investment that China is doing there. You are going to see outbound tourism is going to grow well, we are very bullish on that. It can help countries like South Korea and Japan, India has a good role to play with that. I am quite negative on Hong Kong.
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