Rate cut shows China facing up to pressure on the real economy

23rd October 2015

The cut in Chinese interest rates may indicate the Chinese government accepts its economy is facing more challenges than third quarter growth figures might suggest says Xiaoyu Liu, fund manager, Asia Pacific Equities at Aviva Investors.

Liu says: “This cut indicates that the Chinese government is facing up to the real economy being under more pressure than the recently announced Q3 growth figures (6.9%) had suggested. The ‘Li Keqiang’ Index, which tracks the growth of bank lending, rail freight and electricity consumption, has declined sharply in the past two years and only grew 3% in the year to August. Although, not a perfect index, it offers some colour to the magnitude of the slowdown of the underlying economy.

“The weak economy has affected the profitability and cash flow of many companies, especially in the traditional sectors of industrial, manufacturing and real estate. We have seen a few defaults recently, even of state owned companies, and the problems for unlisted companies are even bigger. The Government has shown that it is aware of the overcapacity problems, and understands that investment-led growth cannot continue for ever. But it wants to use these policy tools to smooth out the transition period.”

Liu adds: “This is positive news for Chinese equities, particularly companies in the property and utility sectors where there is high financial leverage. In my view, this is neutral to negative for the banks. Although the rate cut will help with non-performing loans, it will narrow their interest rate margin.”

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