PBoC cuts MLF again as economic data continues to disappoint
On 15 August 2023, the People’s Bank of China (PBoC) cut its 1-year Medium Term Lending Facility (MLF) by 0.15% to 2.50% and its 7-day open market operation (OMO) repo rate by 10bps to 1.80% (Fig 1). This is the second MLF and OMO cuts in 2023, with MLF being adjusted by a larger amount than the previous 10bps cut in June – signifying the authorities’ increasing concerns about China’s faltering economic recovery.
Missing already low expectations:
China’s latest key economic data disappointed the markets (Fig 2a) with industrial production (IP) slowing to 3.7%y/y, fixed asset investments (FAI) moderating to 3.4y/y and retail sales declining to 2.5%y/y. Weaker IP was reflected in sharply lower trade data and PMI - with exports (Fig 2b) plunging by 14.5%y/y in June as international demand for goods faded and manufacturing PMI slipping into contraction territory.
Meanwhile, slower investment suggests heightened private sector uncertainty with manufacturing, infrastructure and property investment all lowered. Finally, hopes of a domestic, service sector-led recovery were depressed as consumers reduced discretionary and restaurant spending. Unemployment ticked higher to 5.3% – notably the National Bureau of Statistics (NBS) suspended publication of the youth unemployment rate, which hit a record high of 21.3% in the previous month.
Following recent dovish comments by the State Council, market driven interest rates (Fig 3) had declined in anticipation of additional monetary policy easing – although most investors expected a reserve requirement ratio (RRR) cut. In response to the MLF and OMO cuts, interest rates declined, and the yield curve flattened; meanwhile the CNY weakened to a ten-month low versus the USD. Subsequently, many economists have revised down their 2023 growth rates towards or below the government’s official “around 5%” target.
Outlook:
The PBoC’s rapid response to recent, weaker than expected economic data confirms its dovish policy stance, with the MLF and OMO rate cuts supporting cheaper lending costs while ensuring adequate liquidity – which should help stabilize economic growth. In contrast, fiscal policy has been limited and lethargic, suggesting the government is reluctant to significantly loosen property restrictions or boost private spending – both widely regarded as critical to boosting growth from the current, weakening trajectory. Investors now anticipate a Loan Prime Rate cut and potentially additional RRR cuts as the PBoC attempts to supporting growth and confidence.
For RMB cash investors, interest rates are likely to remain on a downward trend for the foreseeable future. However, we believe a diversified strategy across different investment options and tenors – including liquidity and ultra-short duration strategies continues to present opportunities in achieving an attractive return while balancing the needs for liquidity and security.
09g3231608034636
NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations.
This information is generic in nature provided to illustrate macro trends based on current market conditions that are subject to change from time to time. This generic information does not take into account any investor’s specific circumstances or objectives and should not be construed as offer, research or investment advice.
This is a promotional document and is intended to report solely on investment strategies and opportunities identified by J.P. Morgan Asset Management and as such the views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. This document is confidential and intended only for the person or entity to which it has been provided. Reliance upon information in this material is at the sole discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any particular receiver. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are those of J.P. Morgan Asset Management, unless otherwise stated, as of the date of issuance. They are considered to be reliable at the time of production, but no warranty as to the accuracy and reliability or completeness in respect of any error or omission is accepted, and may be subject to change without reference or notification to you.
Investment involves risks. Any investment decision should be based solely on the basis of any relevant offering documents such as the prospectus, annual report, semi-annual report, private placement or offering memorandum. For further information, any questions and for copies of the offering material you can contact your usual J.P. Morgan Asset Management representative. Both past performance and yields are not reliable indicators of current and future results. There is no guarantee that any forecast will come to pass. Any reproduction, retransmission, dissemination or other unauthorized use of this document or the information contained herein by any person or entity without the express prior written consent of J.P. Morgan Asset Management is strictly prohibited. J.P. Morgan Asset Management or any of its affiliates and employees may hold positions or act as a market maker in the financial instruments of any issuer discussed herein or act as the underwriter, placement agent or lender to such issuer. The investments and strategies discussed herein may not be appropriate for all investors and may not be authorized or its offering may be restricted in your jurisdiction, it is the responsibility of every reader to satisfy himself as to the full observance of the laws and regulations of the relevant jurisdictions. Prior to any application investors are advised to take all necessary legal, regulatory and tax advice on the consequences of an investment in the products. Securities products, if presented in the U.S., are offered by J.P. Morgan Institutional Investments, Inc., member of FINRA. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.
To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy. This communication is issued by the following entities:
In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be. In Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919).
Malaysia, Philippines, Brunei, Thailand, Indonesia, India, Vietnam, Bhutan and Korea: This document is provided in response to your request. This document is for informational purposes only and does not constitute an invitation or offer to the public. This document including any other documents in connection are for intended recipients only and should not be distributed, caused to be distributed or circulated to the public. This document should not be treated as a prospectus or offering document and it has not be reviewed or approved by regulatory authorities in these jurisdictions. It is recipient’s responsibility to obtain any regulatory approvals and complying with requirements applicable to them.
People’s Republic of China: This document is private and confidential and is issued to you upon your specific request and is provided for your internal use and informational purposes only. It may not be photocopied, reproduced, circulated or otherwise distributed or redistributed to others. This document does not constitute an offer, whether by sale or subscription, in the People's Republic of China (the "PRC"). Any interests stated is not being offered or sold directly or indirectly in the PRC to or for the benefit of, legal or natural persons of the PRC. Further, no legal or natural persons of the PRC may directly or indirectly purchase any beneficial interest therein without obtaining all prior PRC’s governmental approvals that are required, whether statutorily or otherwise. Persons who come into possession of this document are required by the issuer and its representatives to observe these restrictions.
For materials distributed to wholesale clients in Australia, please note the following : Pursuant to ASIC Class Order 03/1102 and ASIC Class Order 03/1103 applicable to JPMorgan Asset Management (Singapore) Limited ("JPMAMSL") and JPMorgan Funds (Asia) Limited (“JPMFAL”) respectively, JPMAMSL and JPMFAL are exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Commonwealth)) in respect of the financial services provided by JPMAMSL or JPMFAL in Australia to wholesale clients. A copy of which may be obtained at the website of the Australian Securities and Investments Commission www.asic.gov.au. The class order exempts JPMAMSL and JPMFAL respectively from the need to hold an AFSL for financial services provided to Australian wholesale clients on certain conditions. Please note that JPMAMS is regulated by the Monetary Authority of Singapore (MAS) under the laws of Singapore, which differ from Australian laws. Similarly, JPMFAL is regulated by the Securities and Futures Commission (SFC) of Hong Kong under the laws of Hong Kong, which also differ from Australian laws.
If you would prefer not to receive these communications, you have the right to opt out. Please return email with unsubscribe in the subject line to your usual J.P. Morgan Asset Management client advisor.
Copyright 2023 JPMorgan Chase & Co. All rights reserved.