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According to ETF Securities, chinese domestic equities could benefit from more economic stimulus

Shadow banking is being reduced, in favor of bonds issued on the financial markets. In fact, to avoid credit drying up, the government, for example, has allowed local governments to issue their own bonds, which should "increase transparency and improve investor confidence...

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In the third quarter 2014, China has experienced a significant growth slowdown. Indeed, according to the NBSC ("National Bureau of Statistics of China"), the pace of the chinese GDP, between July and September (7.3%), was the lowest since 2009, after a level of 7.5 % in the second quarter.

So far, the economic growth rate far exceeds the 10% threshold, which the country had accustomed us during this last decade. It is true that the current rebalancing of the Chinese economy towards an economic model more focused on domestic demand rather than exports and investment may take some time.

However, the Chinese government has decided to take things in hand, especially with "more stimulus" as recalled a recent research note published by ETF Securities, a leading independent provider of financial products exchange-traded. For example, since last October, the tax threshold for small businesses has been increased to improve corporate margins. Obviously, the government is focused mainly on the financial sector, which draws foreign investors attention, in particularly with the shadow banking.

However, as indicated on the chart below, since the beginning of the year, the weight of the "shadow banking" is being reduced, in favor of bonds issued on the financial markets. In fact, to avoid credit drying up, the government, for example, has allowed local governments to issue their own bonds, which should "increase transparency and improve investor confidence," according to ETF Securities note.

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Along the same lines, in last October, the Central Bank of China ("People’s Bank Of China - PBOC") injected 200 billion yuans into the 20 largest domestic banks, after a previous similar operation (500 billion yuans) performed a month earlier. Meanwhile,the monetary authorities has decided to gradually reduce the levels of short-term interest rates.

All of which should enable Beijing to achieve its growth target of 7.5% for this year. Moreover, the research note published by ETF Securities said that the GDP for the third quarter was above consensus expectations", heralding very strong economic outlook, with more stimulus decided by the government; which should be beneficial to the Chinese domestic equity market.

Next Finance , January 2015

Article also available in : English EN | français FR

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