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Asia-Pacific

China Signals More Stimulus Ahead

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More stimulus announced. Last week, China’s State Council announced several credit-easing approaches to tackle downward pressure. Measures include bringing forward the quota for local government special bond issuance to boost infrastructure investment. The State Council also explicitly called for timely Reserve Requirement Ratios (RRRs) cuts.

 

Separately, China’s Vice Premier Liu He announced that US-China trade talks would resume in early October, after working level talks to take place in mid-September. This could help lift market sentiment, and may also push back the step up from 25% to 30% on the first $250bn of Chinese goods that Trump had threatened to implement on Oct 1.

 

Inclusion into benchmark bond indices bring passive inflows. JP Morgan (JPM) will include China into its Government Bond Index-Emerging market (JPM GBI-EM) over a 10-month period, starting on Feb 28, 2020. China’s weight will be subject to a 10% cap of GBI-EM global and narrow diversified indices, which may translate into $25bn passive inflows to China Government Bonds (CGBs). JPM’s inclusion follows after Bloomberg Barclays move earlier this year. Should the World Government Bond Index compiled by FTSE Russell follow suit, full inclusion by all three indices could attract nearly $300bn total passive inflows in coming two years, which accounts for roughly 2.5% of Chinese bond market value.

 

 

Improved outlook for 2H growth. The policy measures and trade talks meaningfully increase the odds that growth in the second half may be better than what markets expect. More proactive policies are likely to be in the pipeline. With the combination of potential bond flows, the RMB could also see support. Though China is the world’s third largest bond market, its size relative to GDP growth is yet well below developed market peers. This indicates growth is likely to accelerate, especially in a world with scarce yields elsewhere.

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