China’s Central Bank
We have been saying for some time that we are concerned about China’s economy. Some say that valuations are at record low levels relative to the US. Our view has been that is well deserved.
The Chinese economy is morphing from an export economy to one that is more focused on consumption. Economies that make that transition just naturally grow at slower rates. But the market has for years assumed that China would rebound towards its 10% annual growth rate. We didn’t assume that was the case and it turns out it was not.
We already have China exposure investing in companies that do business with China (including cell phone companies, etc.). We don’t see a need to add more concentrated exposure in this volatile economy.
China announced a reduction in the reserve requirements for banks as they try to stimulate their economy out of a deep economic slump. A recent CNBC article highlighted this surprising (but likely needed) move.
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“China will cut the amount of cash banks need to have on hand, known as the reserve requirement ratio, or RRR, by 50 basis points, People’s Bank of China Gov. Pan Gongsheng said during a press conference on Tuesday.
Pan, who was speaking to reporters alongside two other financial regulator heads, did not indicate exactly when the central bank would ease the policy but said it would be in the near term. Depending on conditions, there may be another cut of 0.25 to 0.5 basis points by the end of the year, Pan added. He also said the PBOC would cut the 7-day repo rate by 0.2 percentage points.
China’s 10-year government bond yield hit a record low of 2% after Pan’s opening remarks.
Later in the press conference, he also signaled that a 0.2-0.25% cut in the loan prime rate is possible, without specifying when or if he was referring to the one-year or five-year LPR. Last Friday, the PBOC kept its main benchmark lending rates unchanged at the monthly fixing.”
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