A series of new monetary policy measures in China this week may leave some investors questioning the impact on China’s slowing economy and on global markets. In our view, challenges remain for China both from an economic and a market perspective. One of our key takeaways is that China’s potential as a catalyst for market volatility continues.
This week’s moves were highlighted by a cut in interest rates and bank reserve-requirement ratios by the People’s Bank of China (PBoC), which we believe were efforts to stem the slide in China’s stock market and to cushion the country’s slowing economy. Additionally, the PBoC also modified one-year deposit limits in what we view as another step toward China’s goal of liberalizing interest rates.
Further easing of monetary policy was probable, in our view, over the next several months, fueled by increasing evidence of a slowdown in Chinese output growth as well as low inflation. We believe factors such as the 22% four-day slide in the Shanghai Composite Index (as of Aug. 25) may have pushed Chinese authorities to move earlier than originally intended.
We believe this week’s 0.25% cut in policy rates does not, in itself, represent a dramatic injection of monetary stimulus—it does not transform growth or inflation outlooks. Instead, we think Chinese authorities are sending a signal that they have the capacity to respond to a disorderly slowdown and are willing to act, rather than sit on the sidelines.
Events such as this week’s global equity market decline and the role of Chinese markets are, in our view, a few of the reasons investors should anticipate higher market volatility. If (we believe more likely when) investors are faced with a less robust equity market return environment than the last several years, we believe investors should understand the role that well-diversified portfolios which seek to limit downside exposure potentially can play.
