Mixed signals on economic recovery prompt China to cut interest rates

The strength of China’s economic recovery came into question after the country’s post-Covid re-opening boost appeared to be stalling during Q2.

Increases in retail sales and industrial output helped China’s economy to grow 4.5% year on year in the first three months of 2023 after expanding 2.9% in the final quarter of 2022. However, growth in industrial output in May was less than forecast. China’s central bank, the People’s Bank of China cut key lending rates in June to encourage more borrowing and boost economic recovery. Underscoring Beijing’s commitment to ensuring a successful economic reopening, in June, China’s Premier Li Qiang said that China GDP growth in calendar Q2 would be higher than Q1, while reiterating the annual economic growth target for 2023 of ‘around 5%’.

With tensions simmering over China’s longer-term unification plans for Taiwan and a Chinese spy balloon destroyed while flying over the US earlier in the year, US Treasury Secretary Janet Yellen urged against decoupling the US economy from China. The strain in political relations between China and the US appeared to ease a little in June following the visit to Beijing by US Secretary of State Antony Blinken.

In Taiwan and South Korea, key technology stocks such as Taiwan Semiconductor Manufacturing and Samsung Electronics surged. Taiwan’s economy contracted in the first three months of 2023. South Korea’s economy grew quarter on quarter in the first quarter of 2023 after shrinking in the previous quarter. South Korea’s annual inflation rate eased to 3.3% in May from 3.7% in April. The slowdown in inflation saw the Bank of Korea leave interest rates unchanged at 3.5% in April and May.

An easing in food price rises and transport costs saw Australia’s annual inflation fall to 7.0% in the first three months of 2023, down from a 30-year high of 7.8% in the final quarter of 2022. Despite the reduction in inflation, a surprise increase by the Reserve Bank of Australia took interest rates up 0.25% to 4.1% in June. The unexpected move followed a similar 0.25% hike in May and took rates to their highest level since April 2012.

Brooks Macdonald’s view

We have a positive outlook for Asia Pacific (excluding Japan) equities, reflecting the opportunity to gain exposure to attractively valued markets and their faster-growing economies – for 2023 the IMF estimates that China and India will contribute around half of global GDP growth. While the region’s equity markets have given back some of their performance in Q2, sentiment in June was lifted by interest rate cuts from the People’s Bank of China for the first time since August 2022. With China annual consumer inflation around zero, China’s central bank can afford to lower the cost of credit to businesses as well as indirectly incentivise households to spend pandemic-accrued savings. With expectations of more China government stimulus to come, we see the potential for investor tailwinds to rebuild this year. Within our broader Asia Pacific ex-Japan allocation, we seek a value-investment-style skew, recognising the positive optionality for a continued Beijing-driven economic re-opening trade in 2023.