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A glimmer of hope amid China’s lockdowns?

22 April 2022 |
Active ESG
The People’s Bank of China held key interest rates steady this week despite widespread expectations that it would further loosen its monetary response
  • The central bank also announced additional support measures to help cushion the economic slowdown
  • But further global supply chain shocks could result as a by-product of China’s zero-Covid policy restrictions

The People’s Bank of China (PBoC) held key interest rates for corporate and household loans steady on Wednesday in the face of slowing economic growth because of strict Covid-19 lockdowns and the fallout from the conflict in Ukraine.

The central bank kept its one-year loan prime rate unchanged at 3.7%, while also holding steady on its five-year rate at 4.6%, despite widespread market expectations that it would further loosen its monetary response after cutting rates in January1.

“The fact that the PBoC kept rates steady rather than the expected lowering suggests strength in the Chinese economy despite lockdowns, though this disappointed investors looking for more stimulus,” says Geir Lode, Head of Global Equities at Federated Hermes.

China posted better-than-expected GDP growth of 4.8% in the first quarter, although retail sales slumped in March as authorities enforced strict lockdowns following a fresh surge in Covid-19 cases. The entire population of Shanghai – a financial hub of 25 million people – has been confined to their homes this month. On Monday, the PBoC announced additional support measures to help industries, firms and people affected by Covid-19 outbreaks as part of efforts to cushion an economic slowdown2.

Policy tightrope

Over the course of the year, the PBoC is likely to provide more liquidity with fiscal policy set to play a more prominent role, says Silvia Dall’Angelo, Senior Economist at Federated Hermes. “Overall, the policy effort will likely be as measured and targeted as possible, as Chinese policymakers walk their own tightrope,” she says.

“On the one hand, they need to stabilise short-term growth ahead of the 20th National Party Congress in the Autumn, when President Xi Jinping will seek an unprecedented third term. At the same time, policymakers will likely remain wary of excessive stimulus resulting in structural imbalances and financial stability risks in the longer-term.”

Despite some Asian indices inching higher this week following the PBoC’s announcements, the overall picture in the region remains uncertain with the Hang Seng Index down 11.6% year to date and the CSI 300 Index of Shanghai and Shenzhen-listed stocks down 19.1% this year as of 21 April3.

The slowdown in the world’s second largest economy has added to earnings risk for consumer discretionary businesses with exposure to low-to-mid-income consumers in Europe, says James Rutherford, Head of European Equities at Federated Hermes.

“We are concerned that markets may be underpricing the impact of further supply chain shocks emanating out of China as a by-product of the country’s zero-Covid policy restrictions. This combination means we see higher risk to quarterly earnings guidance disappointment for large sections of the European equity market,” Rutherford says.

Figure 1: China’s key interest rates (%)

China’s key interest rates (%)

Source: Bloomberg, as at 21 April 2022.

Looming stagflation

The sharp rise in inflation across the developed world coupled with slowing growth has led to increasing concerns that many countries are heading for a prolonged period of stagflation. The US Consumer Price Index (CPI) rose 8.5% over the year to end March, as the war in Ukraine drove up food and energy costs4. The International Monetary Fund (IMF) cut its growth 2022 forecast for the US by 0.3 percentage points to 3.7% on Tuesday.

In a half-yearly update, the IMF said the prospects for global growth had “worsened significantly” because of the war in Ukraine, as it reduced its growth estimate for 2022 from 4.4% to 3.6%5.

“Earnings season has kicked off and so far there has been little to avert the investor pessimism as inflation and interest rate expectations start to bite, with quarterly numbers from consumer staples and energy names expected to be strong but few other positive sectors,” says Lode.

“In particular, due to the uncertainty of the macro environment, expectations are low with regard to forward estimates and guidance, building on lowered expectations from the previous quarter.”

However, Lode says one area that does offer some reprieve for investors is around share buybacks with companies expected to continue to favour buybacks under these uncertain market conditions, allowing for greater financial flexibility should the growth outlook worsen considerably.

“For consumer goods companies, product innovation and the associated price premiumisation has also enabled strong brands to deliver price increases as well as retaining customers,” he says.

For further insight on how the war in Ukraine has affected the outlook for investors read our latest update in which Eoin Murray, Head of Investment, Federated Hermes, argues that ESG investing is the key to security in energy, food and commodities.


Risk profile

The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

1 Chinese Banks Hold Lending Rates as Yuan Weakness Looms – Bloomberg

2 China to step up financial support for industries hit by COVID outbreaks | Reuters

3 Bloomberg as at 21 April

4 US inflation hits 8.5% after surge in energy and food prices | Financial Times

5 World Economic Outlook, April 2022: War Sets Back The Global Recovery (imf.org)

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