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Rate cut report card: winners and losers from China’s latest action

Rate cut report card: winners and losers from China’s latest action

The People’s Bank of China opted to cut its benchmark interest rate for the second time in just over three months on February 28 in a move designed to reignite growth in the country.

While it was not as surprising as November’s sudden shift, top managers believe it will create real winners and losers within the domestic market.

The move to cheaper financing costs, with the base rate reduced 25 basis points to 5.35%, will lead to increased opportunities in companies dependent on securing capital, according to top managers.

Citywire + rated Thomas Schaffner, who runs the Vontobel Fund China Stars Equity fund, said, while growth is expected to be lower, he is focusing on areas which can benefit from top down measures.

He said: ‘The cut was definitely a positive step for the Chinese equity market and Chinese companies will benefit from the low financing costs. We think that especially financial names will benefit from this move.’

‘Also likely to respond positively will be those connected to the property market, which, on the one side, will also benefit from the low financing costs. Meanwhile, low mortgage interest rates will result in higher sales volume.’

Schaffner believes the risk now lies with reform measures, which are viewed as pivotal in moving the market away from its ‘old economy’ model of state-owned enterprises and fixed income investing.

‘The biggest long term risk for the Chinese economy is that the reform process will not be further implemented and that China will fall back on its old economy model.’

‘At the moment though, we are not seeing any signs of this. Our outlook continues to be positive for the Chinese stock market, though we appreciate that growth figures will be lower – and in the longer term more sustainable - due to the reforms.’

Doesn’t improve attraction

William Fong, who runs the Baring China Select fund, echoed Schaffner and said those firms with heavy dependency on lending or capital costs stand to be the big beneficiaries from the latest measures. However, he said he will not be drawn into these areas of the market.

‘The cut will benefit high gearing companies, but not all of them are appealing to our portfolio. We focus on long term structural growth in sectors such as health care, technology and travel, which may not necessarily benefit from this rate cut in the short term‎.’

‘More economic sensitive sectors like construction, property and machinery will be more affected in the long term‎. At the moment we feel very comfortable with our positioning for China's long term growth and will review our position from time to time.’

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