Reorient Financial Markets sees an improvement in China’s financial markets despite the recent market meltdown.
The Hong Kong-based investment house noted in its latest China Compass report that the People’s Bank of China (PBOC) published a set of monetary statistics on Jan. 15 that shows the aggregate volume of domestic financings had surged into end-2015. Reorient says the trend was driven by record corporate bond issuances in the month and a strong pickup in equity-based fund raisings.
New yuan loans also came in better than expectations. “These data points reaffirm our earlier reading that China’s financial markets have regained vigor and are busily pumping liquidity to the economy in transition, despite turbulence in the country’s equity markets,” the report said. “Such developments foreshadow a decent start for 2016 and should have been cheered by the markets under normal circumstances.”
Reorient added that while Chinese equities have entered a bear-market, recent PBOC currency market action also provides some basis for hope. Through intervention in off-shore Chinese yuan traded through the Hong Kong (CNH) market and by raising CNH funding costs temporarily to prohibitive levels, the PBOC has succeeded in bringing the CNH/Chinese yuan (CNY) differential down to a minimum.
Reorient says the PBOC’s actions “stem the negative (essentially deflationary) impact of further RMB decline” — though it believes the Chinese currency must and will be allowed by regulators to “depreciate further and to undo the negative effect for the Chinese economy of a seriously elevated real effective exchange rate since mid-2014.”
The investment house’s China team also notes that “the aggregate volume of domestic financing surged into end- 2015, driven by record corporate bond issuance and a strong pickup in equity-based fund raising” and that “these data points reaffirm our earlier reading that China’s financial markets have regained vigor and are busily pumping liquidity to the economy … despite turbulence in equity markets.”
“The numbers speak for themselves. We also expect further monetary easing after the Chinese New Year holidays. In combination, currency and monetary policy measures should allow equity markets to regain their footing,” Reorient said in its report.
Reorient correctly predicted that China’s just-announced 4Q2015 GDP would prove in line with expectations and could “help calm investor nerves.” Chinese stocks surged Tuesday after China reported that GDP grew 6.9% in 2015.