CHINA
Source: Citi/MNI - Market News/Bloomberg
- Broader market skepticism/concern around China stimulus efforts (which have aided data outcomes at the margins) to boost the growth outlook is likely helping keep growth forecasts steady. Stimulus measures have been steady rather than a big bang stimulus, which the authorities still appear to be wary of.
- China’s Political Bureau of the CPC Central Committee held a meeting on December 9, resetting the tone for monetary policy to ‘moderately loose’ from ‘prudent’.
- Historically this tone has only been used when there is pressure to stabilize domestic prices and the Federal Reserve is in an easing cycle, both of which are, in the opinion of the committee, likely to exist next year.
- As usual with the output from these meetings, it is about setting the tone, not the execution of the policy.
- Still, onshore media is stressing the need to speed up economic policy implementation (see this link). At the same time, the Economic Daily has reinforced the need for certainty around meeting economic targets to stabilize broader economic conditions (see this link). An actual growth target for next year wasn't specified though.
- Such a backdrop suggests further policy support is on the way, with RRR and rate cuts to potentially feature early in 2025. This could leave local bonds the best expression for the mix of policy support/growth concern that the market may see.
- The China currency may also depreciate, particularly if the tariff threat is realized, but the pace of depreciation is still likely to be managed. For local equities, the authorities have introduced support via the PBoC swap facility, which may curb downside risks for the major benchmark indices.
- The second chart plots the J.P. Morgan Growth forecast revision index for China (FRI), against the 10yr government bond yield. Until growth expectations move materially higher, the market may feel comfortable expecting lower yields.
- The main risk at this stage is likely to be the pace of bond yield falls prompts intervention/jaw boning from the authorities, but this is unlikely to change the yield trend over the longer term.
Fig 2: J.P. Morgan China Forecast Revision Index & 10yr CGB Yield
Source: Citi/MNI - Market News/Bloomberg
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