Head of China Research - Forsyth Barr Asia, Forsyth Barr Asia

David Millhouse

Head of China Research - Forsyth Barr Asia

Forsyth Barr Asia

Thematic (Sector/Industry)

POLICY INACTIVITY AND MISMANAGEMENT HAS BECOME AN ENORMOUS ISSUE IN CHINA;&nbsp; It had been strongly hoped we would get a RRR cut over the weekend. Not only did we NOT get one, the PBOCs financial publication (The Financial News) has this morning flagged that the PBOC will use open market operations and medium-term lending facilities to inject more funds into the market, as they are more flexible. It also flagged the PBOC will not be buying as much foreign exchange in the future. These comments have obviously lead the market to believe there will be no near term monetary loosening. As a result the market is off 9%. In our view, the PBOC has been behind the curve on monetary policy, slow to try and fix the structural issues hindering fiscal policy, and extremely slow on reform in the past 6 months (in particular SOE reform).&nbsp; We believe the last few months highlights the lack of cohesion within the party on both policy and reform direction, and we are starting to get concerned on friction within the party (note xi&rsquo;s comments in national media last week about the push back he has received with the reform agenda).&nbsp;Additionally, the current emphasis on meeting short-term growth targets will make it more challenging to implement the policies necessary to shift growth to a more sustainable medium-term path.

POLICY INACTIVITY AND MISMANAGEMENT HAS BECOME AN ENORMOUS ISSUE IN CHINA;&nbsp;  It had been strongly hoped we would get a RRR cut over the weekend. Not only did we NOT get one, the PBOCs financial publication (The Financial News) has this morning flagged that the PBOC will use open market operations and medium-term lending facilities to inject more funds into the market, as they are more flexible. It also flagged the PBOC will not be buying as much foreign exchange in the future. These comments have obviously lead the market to believe there will be no near term monetary loosening. As a result the market is off 9%.  In our view, the PBOC has been behind the curve on monetary policy, slow to try and fix the structural issues hindering fiscal policy, and extremely slow on reform in the past 6 months (in particular SOE reform).&nbsp; We believe the last few months highlights the lack of cohesion within the party on both policy and reform direction, and we are starting to get concerned on friction within the party (note xi&rsquo;s comments in national media last week about the push back he has received with the reform agenda).&nbsp;Additionally, the current emphasis on meeting short-term growth targets will make it more challenging to implement the policies necessary to shift growth to a more sustainable medium-term path.

POLICY INACTIVITY AND MISMANAGEMENT HAS BECOME AN ENORMOUS ISSUE IN CHINA