ATF indices gain as signs of policy direction emerge

Targeted easing seems to be emerging as China’s preferred approach, after conflicting statements about its policy stance confused the market   

ATF indices gain as signs of policy direction emerge
The ATF China Bond 50 Index rose 0.02%

(ATF) All the ATF indices gained on Thursday, amid signs that the People’s Bank of China (PB0C) will maintain its easing stance, but will adopt a targeted rather than a broad-based monetary policy.

The ATF China Bond 50, the flagship index, rose 0.02%, while the ATF ALLINDEX Corporates, Enterprise, Financial and Local Governments all gained 0.01%.

The State Council’s call on June 18 for a cut in the Reserve Ratio Requirement (RRR) in order to stimulate the economy and inject more liquidity led many analysts to speculate that a reduction  was imminent. 

The ALLINDEX Corporates Index rose 0.01%

However, instead of heeding the State Council’s call, the PBoC appears to be taking a more targeted approach. On Tuesday, it announced a cut in the re-lending and re-discount interest rates. 

The purpose of the cuts is to increase the incentives for banks to lend to smaller businesses and to the agricultural sector in order to stabilise employment among migrant workers, said Iris Pang, Chief Economist, Greater China, at ING, in a research note.

The ALLINDEX Enterprise Index rose 0.01%

She is now sceptical of any further broad-based monetary easing this year and believes that further cuts will only be for a targeted purpose. 

“The PBoC is still in an easing cycle, given the overall economic conditions. They are still providing liquidity via the 1.8 trillion yuan re-lending quota and 400 billion yuan loan purchase scheme, but this may be different from the market’s expectation (aggressive cuts in interest rates and RRR),” said David Li, an economist at Bloomberg, in an article by the news organisation.

The ALLINDEX Financials Index rose 0.01%

Li expects the PBoC to cut rates and RRR this year, but anticipates that the Chinese central bank will wait to see whether existing easing actions will translate into lower funding costs for corporates.

Better economic fundamentals also underscore the likelihood of a move away from broad-based easing. China posted strong PMI figures on Monday and Tuesday, with the June manufacturing and non-manufacturing indices coming in higher than forecast. The Caixin PMI also beat expectations.

The ALLINDEX Local Government Index rose 0.01%

However, the surge was largely a result of domestic demand, as external demand remains weak with many countries still struggling with cases of coronavirus. Small manufacturers, which often produce for small exporters, are heavily affected by the slump in global demand. 

On Wednesday, the State Council gave the green light to local governments to use the proceeds of their Local Government Special Bond (LGSB) sales for the purchase of convertible bonds issued by small and medium-sized banks (SMBs). This will allow the lenders to shore up their capital and, in turn, enhance their ability to support smaller enterprises.

“Beijing’s policy to allow local governments to use LGSB to replenish capital for local SMBs suggests Beijing is quite concerned about the transmission channel of its monetary stimulus,” said Ting Lu, in a research note from Nomura.