Briscoe Bulletin – February 2020

An on-the-ground take on what's moving China's economy and markets right now from Hayden Briscoe, Head of Asia Pacific Fixed Income.

11 Feb 2020

Key takeaways:

  • Rate cuts coming across the board in China;
  • High probability of a massive fiscal stimulus, most likely in form of infrastructure spending;
  • Economy: H1 slowdown, H2 rebound;
  • China bonds remain attractive, govt support is positive for credits, bounceback likely in EM currencies and commodities as policy drive picks up pace.

The view from Hong Kong

As I write, coronavirus cases in China have passed 40,000 and face masks now cost HKD 3 each in Hong Kong shops compared to HKD 1 two weeks ago.

Understandably, people are unclear about what to expect. What is clear, however, is that China's government is stepping up.

Outside of the markets, we've seen 1,000 bed hospitals built in 10 days in China. Inside the markets, the government's economic policy machine is springing into action, and this will have major implications for investors.

Rate cuts coming across the board

The People's Bank of China added an estimated RMB 17 trillion1 to onshore money markets on the first days of trading after Chinese New Year on February 3rd and 4th.

The official line is 'appropriate support' but we hear this is likely to be the first of a series of monetary loosening measures, including further liquidity injections, plus interest rate cuts, in the near future.

Additionally, we expect cuts to reserve requirement ratios (RRR) - the minimum amount of capital banks must keep in reserve - with one cut most likely in Q1 20, and quite possibly two.

This is likely to be the first of a series of monetary loosening measures, including further liquidity injections, plus interest rate cuts, in the near future.

Fiscal spending in the pipeline

Monetary measures are pushing capital into the banking system, but we expect massive fiscal measures to drive it into the economy - most likely in the form of increased infrastructure spending.

Infrastructure spending is a tried and tested way of supporting the economy and, while China has already committed to many nationwide, there are still lots of projects that can be brought forward and put into action.

We expect massive fiscal measures

Defaults are off the table

Adding further support to markets, China's government effectively said to regulators and banks that defaults won't be allowed, and has ordered support to the private and public sector. 

Economy: H1 slowdown, H2 rebound

China's services sectors have taken a beating and the effects will likely last for a few more weeks yet. Since services now drive the economy, expect slower economic growth, particularly in Q120 and potentially into Q2.

Stimulus won't reach the economy until H2 20, when we expect a rebound, assuming that the coronavirus can be contained over the next weeks and months.

Stimulus won't reach the economy until H2 20, when we expect a rebound

Key investor takeaways:

  • China government bond yields still have room to tighten, we see 2.7% as a key level on China 10-year government bonds;
  • Investors considering China allocations can consider being fully hedged on the currency, we don’t expect much movement in the FX rate, but the bias is to weaken;
  • Commodities and EM currencies have room to rebound when China launches a stimulus package;
  • Investors can selectively add credits now that policy support is coming through;
  • Position for a H2 rebound.


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