China is a ‘relative safe haven’ in the face of banking stress

The recent banking turmoil in the US and Europe has marked China as a “relative safe haven” this year, Citi economists said in a note Thursday.

Investor sentiment on China was depressed last year by Covid controls and regulatory uncertainty. Now those controls have ended and policymakers have sent clearer signals about regulation.

“Activity momentum could pick up further from here, with auto sales improving and real estate sales stabilizing,” the Citi economists said.

They said China could be an outlier among its global peers to see accelerated expansion, giving the country a “hedge” for growth, while economies in the US and Europe face an increased risk of financial disruption.

“We have long debated our view that China could be a key growth hedge this year – if anything, the recent global banking troubles may have reinforced this proposition,” said a team led by Citi’s Chief China Economist Xiangrong Yu.

“China could at least be a relative ‘safe haven’ given its growth premium, financial strength, policy discipline and the new political economy cycle,” economists at Citi said.

They wrote that the latest actions, such as the People’s Bank of China’s decision to cut its reserve requirements, showed “reassurance of policy support amid global volatility”.

The RRR is a measure of how much cash banks in China should have on hand. The PBOC said it would cut the ratio by 25 basis points for most banks effective March 27. Since the outbreak of the pandemic, mainland China has maintained a relatively accommodative monetary policy without announcing major stimulus packages, such as large cash distributions to consumers.

“Perhaps learning lessons from what the U.S. has been through in recent years, the PBoC has been cautious about easing even during the pandemic era, and may quickly shift to a wait-and-see attitude once growth gets back on track,” it said. economists. wrote at Citi.

They also noted that the Chinese government’s restructuring earlier this month is an example of its efforts to reduce financial risks.

“This year, Beijing is determined to keep local government debt risks at bay, for which we believe it has sufficient tools,” the economists wrote.

As China’s GDP is expected to show relatively excellent growth this year, economists also see a positive side to the currency. Citi expects the onshore yuan to strengthen to 6.6 against the US dollar in September. That would take the currency to its strongest level since April last year.

“With the unintended and unwanted consequences of aggressive rate hikes emerging abroad, capital inflows to China could resume after trade reopening if the recovery thesis materializes and the political realignment is steadily underway,” Citi economists wrote.

“We still believe that the celebration of capital inflows to China is not over and expect USDCNY to rise to 6.6 within 6-12 months,” they said.

That view is further supported by a falling dollar: US Fed Chairman Jerome Powell signaled on Wednesday that rate hikes are about to end, with the US dollar index falling further to an overnight low of 101,915 on Thursday . The index is down about 1.4% week-to-date.

The landscape in China is very different from what is happening in the US and other countries due to rapid rate hikes, Lawrence Lok, chief financial officer of asset manager Hywin, told CNBC in a telephone interview.

Turning to regulatory developments, he said his company sees a clear effort from Beijing to better enable foreign financial institutions to participate in the local market.

“Net-net, the regulatory environment is net positive for the financial sector in China right now,” said Lok.

“Maybe it’s not so friendly to some sectors like high-tech, but I think so [for] the financial sector we are quite positive,’ he said.

Hywin had more than 36,700 active customers and the equivalent of more than $1 billion in assets under management at the end of December.

– CNBC’s Gina Francolla contributed to the report.