In a series of unexpected moves, the Chinese central bank surprised investors by cutting its main short- and long-term interest rates for the first time since August last year. Additionally, the Chinese financial authorities announced a reduction in loan collateral requirements.
The Chinese Central Bank finally injected 435.1 billion yuan (€ 55 billion) at preferential rates during an unscheduled operation.
Monetary easing, a response to economic weakness and the risk of deflation could have significant implications for the Chinese economy. In the second quarter, GDP growth was disappointing, with an increase of only 0.7% compared to the previous three months. Furthermore, inflation is dangerously close to negative territory, standing at just 0.2% in June.
More abundant, accessible credit at lower interest rates should revive domestic demand. It must also curb the real estate crisis, which weighs on the morale and consumption of households, which have mainly invested their savings in bricks.
The fall in interest rates also weakens the yuan's value on the foreign exchange market. This will help the overseas shipment of Chinese products, which increasingly face tariffs that erode their price competitiveness.
Attractive enough even with challenges
The central bank's action shows that the Beijing authorities will do everything possible to achieve their GDP growth target of close to 5% this year.
Even if the country's economic potential diminishes with the ageing population and the reconfiguration of world trade, China still offers attractive enough prospects to invest in. Buy 10% Chinese equities as part of a neutral or dynamic portfolio. Opt for 5% Chinese equities and 5% yuan bonds in a defensive portfolio.
