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 Thursday note.

Investor sentiment on China was weighed down last year by Covid controls and regulatory uncertainty. Now these controls have ended and decision-makers have sent clearer signals about regulation.

“Activity momentum could pick up further from here, with better auto sales and stabilizing property sales,” the Citi economists said.

They said China could be an outlier among its global peers to see accelerated expansion, giving it a “hedge” for growth while economies in the United States and Europe face heightened risks of economic disruption.

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

“China may at least be a relatively ‘safe haven’ given its growth premium, economic solidity, policy discipline and the new political economy cycle,” Citi economists said.

They wrote that recent actions, such as the People’s Bank of China’s decision to cut its reserve requirement ratio, showed “assurance of policy support amid global volatilities.”

RRR is a measure of how much cash banks in China need to have on hand. The PBOC said effective March 27 it would reduce the ratio for most banks by 25 basis points. Since the start of the pandemic, mainland China has pursued relatively easy monetary policy without announcing major stimulus packages – such as large cash handouts to consumers.

“Perhaps learning from what the US has been through in recent years, the PBoC has been cautious about easing even during the pandemic and may quickly switch to a wait-and-see mode once growth is back on track,” the economists wrote at Citi.

They also noted that China’s government restructuring earlier this month is an example of the country’s efforts to ease financial risk.

“This year, Beijing is determined to contain local government debt risks, for which we believe it has adequate tools,” the economists wrote.

With China’s GDP expected to show relatively unprecedented growth this year, economists also see upside for the currency – Citi expects to see the onshore yuan strengthen to 6.6 against the US dollar as soon as September. That will bring the currency to its strongest levels since April last year.

“With unintended and unintended consequences from aggressive rate hikes emerging overseas, capital inflows into China could resume after trade reopens if the recovery task plays out and policy reassessment continues smoothly,” Citi economists wrote.

“We still believe the party of capital inflows into China is not over yet and expect the USDCNY to move to 6.6 in 6-12 months,” they said.

This view is further supported by a falling dollar: US Federal Reserve Chairman Jerome Powell indicated on Wednesday that interest rate hikes are coming to an end, with the US dollar index falling further on Thursday to an overnight low of 101.915. 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 as a result of rapid interest rate hikes, Lawrence Lok, chief financial officer at asset manager Hywin told CNBC in a phone interview.

As for regulatory developments, he said his firm sees a clear effort from Beijing to increase the ability of foreign financial institutions to participate in the local market.

“Net-net, the regulatory environment is a net positive for the financial sector in China right now,” Lok said.

“Maybe it’s not so friendly to some sectors like high tech, but I think [for] financial sector, we are quite positive,” he said.

Hywin had more than 36,700 active customers at the end of December, and correspondingly more than USD 1 billion in assets under management.

— CNBC’s Gina Francolla contributed to this report.