4 Jul

Can You Expect Monetary Easing in China post-Brexit?

WRITTEN BY Lynn Noah FEATURED IN Macroeconomic Analysis

SSE Composite Index rose for the week ended July 1

The Shanghai Stock Exchange (or SSE) Composite Index rose 2.7% for the week and ended at 2,932.48 on July 1. The rise occurred despite a weaker manufacturing purchasing index (or PMI). Speculation rose that the People’s Bank of China (or PBoC) would take steps to ease monetary policy due to rising political uncertainty in Europe.

Meanwhile, post-Brexit, the yuan fell almost 3% from its March level to 6.6 against the US dollar on June 30 as investors flocked to safe-haven assets such as US Treasuries and gold. Observers widely expect that the PBoC, in a bid to boost the competitiveness of Chinese exports and prop up the sagging economy, may allow the yuan to drop as low as 6.7–6.8 per dollar in 2016.

Can You Expect Monetary Easing in China post-Brexit?

China’s Beige oBok: The economy picks up in Q2

The Brexit would pose significant downside risk to the Chinese economy, though the implications will pan out over time, according to Leland Miller, co-founder and CEO of China Beige Book International (or CBB), a New York–based research firm focused on the country’s economic performance. The CBB reported that China’s economy picked up in Q2 2016. The services and construction sectors helped boost China’s performance. However, the output, new domestic orders, receivables, and payables weakened from 2015, according to the report.

Miller said, “the Chinese economy has come a long way from a year ago and is actually on the mend. Driven by the services and construction industries, China is experiencing ‘moderate trend growth.'” Despite the improvement, Miller isn’t very confident that the growth trend will continue unless aggressive economic reforms are introduced.

Investment impact

Last week, mutual funds such as the Matthews China Fund – Investor Class (MCHFX) and the Columbia Greater China Fund – Class A (NGCAX) were up 5.0% and 4.3%, respectively. Meanwhile, for the same period, the iShares MSCI China ETF (MCHI) and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) were down 5.7% and 2.9%, respectively.

American depository receipts (or ADR) for NetEase (NTES), China Biologic Products (CBPO), and Alibaba Group Holdings Limited (BABA) were up 7.3%, 5.4%, and 4.4%, respectively, for the week.

In the next part of this series, we look at how the Brexit could impact the Chinese economy.

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