Investment strategy
October 1, 2021
2 mins

China may ease policy while others tighten

October 1, 2021
2 mins
Ken Peng
Head of Asia Investment Strategy
SUMMARY

Following the Evergrande situation, China is now rationing power supply across the nation faced with an energy cruch. Given the ongoing macro issues, Beijing may ease near-term monetary policy just as other nations reduce stimulus.


  • China’s economic growth has most likely fallen well below 6% in 3Q and risks of sub-4% growth are rising for 4Q. Stopping this “rot” would require immediate policy support across not just monetary and fiscal policy, but now also short term de-carbonization actions.
  • The People’s Bank of China (PBOC) held an unscheduled meeting on Sep 27 and pledged to safeguard the orderly operation of the property market, and to protect homebuyers. The central bank also conducted a large amount of reverse repo operations to inject liquidity into the system nearly every day since the Mid-Autumn Festival, amounting to over CNY700 billion in net liquidity injections.
  • Power rationing became the latest major drag on activity, shutting both heavy industry and curbing residential use in late September. But the National Development and Reform Commission said that China would increase coal imports, and may adjust electricity pricing to better reflect market supply and demand.
  • Property sales collapse is also threatening growth. After a 19%y/y drop in August, property sales are poised for deeper declines in September, as potential homebuyers fear whether their pre-sale purchases would be delivered, in addition to the usual eligibility and mortgage restrictions. Ensuring delivery and easing purchase and financing policies are needed and likely.
  • While the policy responses appear to have a “whack-a-mole” pattern, the clear signal is that growth is slowing beyond desired by authorities and policy priority has moved from structural tightening to cyclical easing. We suspect that markets would take longer to restore confidence, particularly as more uncertainties arise from US and Europe.
  • As a result, China appears likely to be easing policy in 4Q and into 2022, just as Fed and several other central banks are considering a stimulus reduction. This may be negative for the CNY, but is likely positive for Chinese equities after a prolonged period of underperformance.

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