PBOC Rate hike and Regional Equity

Wednesday, PBOC surprised the market with a 25 bps hike in the 1-year deposit rate.

Ø  The timing was a surprise as street economists mostly expect the hike coming by year-end or early next year.

Ø  I think under today’s market circumstance, the most hated thing is uncertainty. Thus, a short-term market correction is not unexpected.

However, if looking at broader picture, the rate hike itself is not a reason to get bearish.

Ø  Economically, China is hiking because its economy is doing well and policymakers believe that they can control inflation by boosting rates.

Ø  Policy wise, PBOC’s tightening cycle is still young. It is pre-mature to get bearish at this point.

Ø  Historically (10-year Monthly data), risk assets (Asian equities and Chinese equities) have the best performance during PBOC tightening cycles (Used RRR and 1 yr Deposit Rate), which is shown in the three attached charts.