China is a ‘relative safe haven’ in the face of banking stress

The recent turmoil surrounding the banking sector in the US and Europe has highlighted China as a “relative safe haven” this year, economists at Citi said in a note Thursday.

Investor sentiment in China was weighed down last year by Covid controls and regulatory uncertainty. Now that control is over and policymakers have sent a clearer signal about regulation.

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“Activity momentum could go further from here, with auto sales and property sales stabilizing,” Citi economists said.

He said China could be an outlier among its global peers in seeing rapid expansion, giving the country a “fence” for growth as economies in the US and Europe face the risk of financial disruption.

“We have long discussed the view that China could be the main growth hedge this year – if anything, the recent global banking stress may strengthen this thesis,” said the team led by Citi’s Chief China economist Xiangrong Yu.

“China can at least be relatively ‘safe’ because of the growth premium, financial health, policy discipline and the recent political economic cycle,” Citi economists said.

He wrote that recent actions such as the People’s Bank of China’s decision to reduce its reserve requirement ratio show “reassurance of policy support amid global volatility.”

RRR is a measure of the number of cash banks in China that should exist. PBOC said effective March 27, it will reduce the ratio for most banks by 25 basis points. Since the start of the pandemic, mainland China has maintained a very easy monetary policy while not announcing major stimulus packages – such as large cash transfers to consumers.

“Perhaps taking a lesson from what the US has done in recent years, the PBoC has been wise to reduce even during the pandemic and may quickly switch to a wait-and-see mode when growth returns,” the economists said. in Citi wrote.

He also cited China’s government restructuring earlier this month as an example of efforts to reduce financial risks.

“This year, Beijing is determined to maintain the risk of local government debt, which we believe has sufficient tools,” the economists wrote.

As China’s GDP is expected to show relatively significant growth this year, economists are also eyeing a rise in the currency – Citi expects to see it on the ground yuan strengthened to 6.6 against the US dollar as soon as September. That would bring the currency to its strongest level since April last year.

“With unexpected and unexpected interest rate hikes abroad, capital inflows to China could continue after trade reopens if the recovery thesis plays out and political rerating continues,” Citi economists wrote.

“We still believe the capital flow party to China is not over and expect the USDCNY to move to 6.6 in 6-12 months,” he said.

That view was further supported by the collapsing greenback: US Fed Chairman Jerome Powell on Wednesday indicated that a rate hike is imminent, with the US dollar index falling on Thursday to a low of 101.915 overnight. The index is down about 1.4% week-to-date.

The landscape in China is very different from what’s happening in the U.S. and other countries because of rapid rate hikes, Lawrence Lok, Chief Financial Officer of wealth manager Hywin told CNBC in a phone interview.

As for regulatory developments, he said the company sees clear efforts by Beijing to improve the ability of foreign financial institutions to participate in local markets.

“On net, the regulatory environment is a net positive for the financial sector in China today,” Lok said.

“It may not be friendly to some sectors such as high-tech, but I think so [for] our financial sector is quite positive,” he said.

Hywin had more than 36,700 active clients at the end of December, and the equivalent of more than $1 billion in assets under management.

— CNBC’s Gina Francolla contributed to this report.