In a recent report titled Climbing China’s great wall of worry, BlackRock indicated that reform will play a foremost role in China navigating its economic challenges.
“We expect a grinding, multi-year economic slowdown but think policymakers will be able to prevent a collapse – at least in the short to medium term,” the report said.
In addition to cutting interest rates further, the People’s Bank of China (PBoC) has introduced significant structural reform and short-term stimulus.
BlackRock Investment Institute global chief investment strategist Ewen Cameron Watt said: “The Chinese government is increasingly supporting the economy at a time revenue growth is slowing.”
In the effort to increase liquidity, BlackRock said the PBoC is likely to cut its reserve requirement ratio further (RRR).
“All things being equal, a lower RRR should encourage banks to lend more and stimulate the economy,” the report stated.
BlackRock predicts the PBoC will reduce the RRR from 18.5 per cent to 12 per cent – for every 1.0 per cent cut, approximately 1.5 trillion yuan in liquidity is released.
The PBoC is also using financial projects, such as the China Development Bank, as a tool to stimulate the economy over the long term.
“Potential long-term benefits for China include lowering trade costs through better roads, railways, ports and airports, developing new export markets, putting the domestic infrastructure industry’s excess capacity to work, and promoting the internationalisation of the yuan,” the report said.
As a result of the reform process, Chinese equities have benefited.
BlackRock head of equities Helen Zhu said: “Despite slowing growth in China, recent structural reforms in the economy and capital markets have boosted the performance of China’s equity markets.
“We are seeing attractive investment opportunities in selected banks, property developers, new energy and small and medium-sized companies in the H-share market.”
Ms Zhu pointed out that companies that benefit from structural reform will be the 'winners'.
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