Thursday 27 November 2008
Chinese Rate Cut – GS View
We continue to see long-term values from Chinese stocks but we would be hesitant to chase the potential market rally if it trades up meaningfully on this as both macro and corporate earnings growth are likely to face more downward pressure ahead amid a worsening global growth outlook in ‘09.
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Chinese Rate Cut – GS View
A decisive move by the PBOC to mitigate downside macro risks On Nov 26, the People’s Bank of China (PBOC) cut 1-year nominal benchmark lending and deposit rates by 108 bps, the largest single rate cut in recent-year history, and decreased required reserve ratio by 100bp.
We think the government’s determination to aggressively loosen monetary policy, in conjunction with the recently announced fiscal stimulus package, have sent a firm signal that it is committed to safeguard the economy from falling into a hard-landing scenario. This rate cute also timely addresses the sharply slowing real activities growth in recent months and the rising real interest rates amid the abating inflationary pressure.
Although we concur that pro-growth policies from the Chinese government could mitigate downside economic risks, we believe a cyclical downturn is inevitable as the so-called “triple-headed chariot”- exports, investment and consumption - are all being hampered by various external and internal factors. We still believe China’s growth momentum could further weaken in the coming quarters before it stabilizes towards the end of 2009.
A near-term boost to market sentiment but earnings still at risks We expect a positive market reaction to the rate cut as lower interest rates could help reduce corporate financing costs (1.2% of 09E earnings), bode well for asset prices and wealth effect, and stimulate aggregate demand.
We continue to see long-term values from Chinese stocks but we would be hesitant to chase the potential market rally if it trades up meaningfully on this as both macro and corporate earnings growth are likely to face more downward pressure ahead amid a worsening global growth outlook in ‘09.
By sector, we see a number of rate responsive sectors, including property, IPPs, and materials, benefiting from lower interest costs and improving end-demand. Large-scaled banks’ margins could expand and asset quality risks could retreat. Insurers’ investment returns may come under pressure but the potential gains from equity investment remains a swing factor.
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