Global Liquidity Market & Portfolio CommentaryContributor Aidan Shevlin
1Q 2019 review: China’s growth continues to slow
- Economic data remained soft during Q1 with several key series hitting record lows, although the pace of declines eased as government stimulus measures started to take hold.
- The People’s Bank of China assumed a dovish stance, cutting the Reserve Requirement Ratio.
- The central bank’s action helped push Shibor, Treasury bill and policy bank bond yields lower. Reverse repo yields remained broadly stable.
Economic data remained sluggish during the quarter. Activity was also dampened by the Chinese New Year. Q4-18 GDP growth slowed by 1.4% q/q, resulting in a weaker-than expected print, as exports and domestic demand softened. This left 2018 GDP at a decade low of 6.6%. Global trade tensions precipitated sluggish exports and imports; the trade surplus dropped to a 12-month low. Manufacturing output and confidence were lower and the property and retail sectors remained moribund. During the quarter, the government announced several stimulus measures to stabilize economic growth including tax cuts, additional infrastructure spending and further market liberalization. The People’s Bank of China intervened in the markets on several occasions during the quarter, injecting funds via open market operations (OMO) and cutting the Reserve Requirement Ratio (RRR) by 1%. Both measures were intended to boost liquidity, reduce interest rates and unblock the monetary transmission mechanism.
Source: Bloomberg: data as of March 31, 2019.
The yield in our RMB Liquidity Strategy, continued to trend downwards during the quarter due to lower reinvestment yields as market- driven interest rates declined. Weighted average maturity (WAM) declined, with our investments focused in the three-month part of the curve. The strategy continues to be diversified, with key holdings in negotiated time deposits, Shanghai stock exchange repos, policy bank bonds and negotiated certificates of deposit. Liquidity remains good, with a high percentage held in overnight and sub-one week maturities.
The combination of recently introduced government stimulus measures and a dovish central bank has encouraged market participants to expect economic stabilization in the property, infrastructure and private consumption sectors. However, trade tensions remain a concern and manufacturing remains weak, suggesting that further monetary policy easing may be required before the economy can achieve the government’s latest target growth rate.
Key economic data
Amid weaker data, central banks tilt neutral or dovish