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China opens the credit taps

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Saxo Bank has published its Q4 2018 Quarterly Outlook for global markets. Against an uncertain backdrop, the Outlook offered some interesting insight into China’s monetary policy.

Since last May, when the US and China trade war intensified, there has been a shift towards loosening policy and stimulus efforts. Chinese markets have been flooded with cheap central bank liquidity when the Shibor plunged, leading to a pick-up in credit growth.

So far, the most significant impact of Chinese monetary easing is that it has contributed to push the credit impulse – the “change in the change” in credit and a key driver of economic growth – back into positive territory. The magnitude of the impulse is still very limited, but it should increase in coming months and be sufficient to sustain local investment and expansion.

Christopher Dembik, Head of Macroeconomic Analysis, said: “China’s global importance is likely to increase further as the US economy is succumbing to the siren song of protectionism and central bank liquidity injections are falling. In previous periods of lower liquidity or slowing growth, China acted as an adjustment variable by pushing credit upwards as in 2012-13, thereby mitigating the effects of the Fed’s tapering. It seems that China is willing to step in to restimulate the economy once again. The current divergence of monetary policy between China and the rest of the world may still represent a chance for the global economy.”

Eleanor Creagh, Market Strategist, added: “The US-China trade war continues to escalate along with Washington’s shifting perception of China. There remains some hope of keeping these powers aligned, however, as US president Trump and Chinese president Xi Jinping meet in late November at the G-20 summit. Although a deal may be struck, the probability of this outcome seems low given the marked deterioration in diplomatic dialogue and the increasing probability of a new “cold war” fought via technological supremacy.

“Given the likelihood of a trade war escalation over the next few months, the Chinese equity market could experience another leg down. For longer-term investors, short-term market noise should not detract from the fundamental opportunity. The attractive valuations are indicative of the potential for future returns once the extremely negative sentiment mean reverts.”

You can access Saxo Bank’s full Q4 2018 outlook, with more in-depth pieces from their analysts and strategists here. You can find out more about Saxo Bank’s UK business, Saxo Capital Markets, here. >

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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