China is a “relative safe haven” in the face of banking stress

Recent turmoil surrounding the banking sector in the United States and Europe has made China a “relatively safe haven” this year, Citi economists said in a Thursday note.

Investor sentiment towards China was weighed down last year by Covid controls and regulatory uncertainty. Now those checks have ended and policymakers have sent clearer signals about regulation.

“Momentum in activity could pick up further from here, with auto sales improving and real estate sales stabilizing,” Citi economists said.

They said China could be an exception among its global peers to see accelerated expansion, giving the country a “blanket” for growth as economies in the United States and Europe face heightened risk of financial disruption. .

“We have long discussed our view that China can be a major growth hedge this year – if anything, the recent global banking strains may have bolstered this thesis,” said a team led by Citi’s chief economist for China, Xiangrong Yu.

They wrote that the latest actions such as the People’s Bank of ChinaThe decision to cut its reserve requirement ratio showed “the assurance of political support amid global volatilities”.

The RRR is a measure of how much cash banks in China need to have on hand. The PBOC said that starting March 27, it would cut most banks’ ratio by 25 basis points. Since the start of the pandemic, mainland China has maintained relatively loose monetary policy while not announcing major stimulus packages, such as large cash handouts to consumers.

“Perhaps learning from what the United States has been through in recent years, the PBoC has been cautious in easing even during the pandemic era and could quickly shift to a wait-and-see mode once growth subsides. back on track,” the economists at Citi wrote.

They also noted Chinese government restructuring beginning of the month is an example of its efforts to mitigate financial risk.

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

While China’s GDP is expected to show relatively exceptional growth this year, economists also see a rise in its currency – Citi expects to see onshore yuan strengthen to 6.6 against the US dollar as of September. This would take the currency to its highest levels since April last year.

“With unintended and unwanted aggressive interest rate hikes surfacing overseas, capital inflows into China could pick up after trade reopens if the recovery thesis materializes and policy reassessment continues steadily.” , wrote the Citi economists.

“We still believe that China’s inflow party is not over yet and expect USDCNY to rise to 6.6 in 6-12 months,” they said.

This view is further supported by a falling greenback: US Fed Chairman Jerome Powell on Wednesday noted as rate hikes come to an end, with the U.S. dollar index falling further on Thursday to hit a low of 101.915 overnight. The index is down about 1.4% since the start of the week.