China Lowering Rates While the Rest of the World are Raising Rates

Two differing news from the largest 2 economies were announced within the last 24 hours:

- China has cut its one year lending rate from 2.75% to 2.65%

- While US has paused rate hikes, they expect another 2 rounds of 25 basis hikes. Fed rates is now standing at 5%

Contrasting Interest Rate Policies

Its definite China is doing a monetary expansion while USA is doing monetary tightening. Due to the differing rates, it is observed the Chinese RMB is on a substantial decline against the US Dollar. Interestingly, despite the constant devaluation of RMB, China's export has not picked up over the past few months, which points to companies leaving China or the effects of US sanctions.

China's Economic Decline

China's current situation can be summarised as below:

(i) Exports are falling

(ii) Youth Unemployment at Record High

(iii) Physical Consumption and E commerce growth are at low single digit growth

(iv) Policy measures has killed off the Real Estate Industry and Construction no longer boosts GDP

Pretty bad pointers to note especially if you a president who is now trying to run for an eternal reign. While US can be blamed for its sanctions, most of the economic decline faced by China is due to internal regulatory changes by the communist party. This has not inspired confidence across any sector in China which is why we are seeing such declines.

China's Rates are Going to be Much Lower

In my view, the medium policy rates and reverse repo rates for China will go much lower. Unlike the US fed dot plot which gives a clearer view of where interest rates are heading, China does not have one. However, given how bad China's economic decline is going, my view is a "China dot plot" will show medium term 1 year interest rates to be at 2% by end 2025 (US's will be 3.5%)

For investors, REIT investing, if there is in China, may be the way. The Chinese Citizens will be forced to buy lower yielding instruments due to its country's lowered interest rate policy. We may see a similar stock market rally in the shanghai shares, similar to the stages of the share market rally of the USA. No doubt economic shape is declining, but the risk free rate in China is falling as well and this will spur stock investing. 

Ignore residential homes despite the risk free rate because there is an oversupply of houses in China and foreigners entry into China is very tight. The risk free rate may be low but if income inflow is 0 from rental, the output returned is still "0".