The equity market sell-off since the beginning of the year provides an entry opportunity into the broader Chinese market, Union Bancaire Privee chief investment officer Norman Villamin said during a recent trip to Asia.
In particular, he believes the financial sector stands to benefit the most from the counter-cyclical policies intended to offset the negative impacts created by an escalating trade conflict with the US.
Chinese stabilisation tools
UBP’s current base-case scenario estimates a trimming in GDP growth by 0.8% to 6% in one year as the economy faces tariffs imposed on nearly half of all Chinese goods exported to the US.
To offset the direct consequences of this, Villamin said he expects the Chinese authorities to continue to release market liquidity via a combination of fiscal and monetary policy.
“We think China has enough policy tools to be able to stabilise the economy above the 6% growth level,” he explained, adding that these include cutting the reserves requirement ratio and devaluing the renminbi against the US dollar.
He also said that the increased liquidity will potentially reduce the inter-bank rates on the mainland. A lower funding cost between banks will eventually improve net interest margins among the smaller players in the banking sector.
Worst case scenario
Even in the early stages of UBP’s risk case, where the trade conflict escalates with levies on all approximately $500bn (£381bn, €434bn) of Chinese exports to the US, the performance of mainland lenders remains intact.
“China’s government can put aside the ongoing deleveraging programme and probably allow private corporates to ‘re-leverage’. The larger-scale banks will therefore benefit from loan-book expansion,” said Villamin. The authority’s debt-cutting efforts to date have been aimed at reducing the systemic risk across the financial sector.
He said the worst-case scenario for an escalated trade conflict is that the GDP growth in China drops to 5.5%. But he also said it is unlikely China will back down or admit defeat in the trade war, making more retaliations possible going forward.
Moreover, the real concern is that trade tensions extend to curbs on foreign investment and tourism between the two countries, according to Villamin. Such a spillover may create some difficulty for Chinese authorities to find a balance between sustaining economic growth and managing the risk of heavy debt accumulation.
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