Fund managers are anticipating a potential upward turn for Chinese assets in the short run following the People’s Bank of China's ( PBoC ) recently announced rate cuts intended to perk up the economy. The positive outlook was supported by Li Yunze, director of the National Financial Regulatory Administration of China, who expects the country’s economy to move forward steadily while overcoming difficulties.

“Generally speaking, the economy continues to rebound and has successfully achieved the expected goal of about 5% GDP growth,” Li says, discussing China’s recent announcement on last year’s economic growth during the Asian Financial Forum held in Hong Kong this week. “This growth is up by 2.2% from the previous year and is also higher than the average growth rate of 4.5% during the three years of the pandemic. This growth rate is also the leader when compared with major economies globally.”

Going forward, Li, while noting that economic development this year faces some difficulties and challenges, states: “China’s economy will be able to move forward steadily while overcoming difficulties and continue to provide a strong impetus for world economic development.”

It was against this backdrop that the PBoC made the decision to cut the reserve requirement ratio ( RRR ) for financial institutions by 0.5%, effective February 5.

This reduction, which excludes institutions already operating with a 5% RRR, will bring the weighted average RRR for financial institutions to approximately 7.0%. Additionally, starting January 25, the PBoC has lowered the rates for agricultural re-lending, small and micro-enterprise re-lending, and rediscount rates by 0.25% respectively.

Fund managers

Chinese mutual fund managers, in general, see the reduction as a positive move that will stabilize capital markets and boost their current fragile sentiment.

This RRR cut, according to analysts, is not due to a tight funding environment – as bank funding rates are moderate and the excess reserve ratio is high – but rather to the PBoC aiming to stabilize the banks’ liability-side costs.

On one hand, the cut can provide liquidity support for fiscal policy and credit extension at the beginning of the year. On the other, it can send positive signals and boost current market confidence. This will, some analysts say, help alleviate pressure on capital outflows before the Chinese New Year.

Historically, an RRR cut is seen as having a generally neutral impact on the stock market. However, given the current relatively low levels in the stock market, this cut is seen, according to fund managers, as a stabilizing measure to counter pessimistic expectations, providing a short-term boost to market confidence.

The positive effect is expected to be more impressive on small-cap stocks, although the long-term market trend is anticipated to be minimally affected. Short-term market fluctuations may persist, fund managers argue, but a shift in sentiment is anticipated, especially after the Chinese New Year in March and April.

In general, market experts foresee improved profitability across various sectors, anticipating a potential upward turn for Chinese assets in the near future.