In response to the economic slowdown, Beijing will support growth and cut reserve requirements for banks, bolstering China-related exchange traded funds.
The Global X China Financials ETF (NYSEArca: CHIX) rose 0.9% Friday while the broader iShares China Large-Cap ETF (NYSEArca: FXI) gained 0.6%. Year-to-date, FXI is down 4.5% and CHIX declined 8.3%.
China’s policy makers will “appropriately” lower reserve requirements for banks that have extended loans to rural borrowers and smaller businesses, Bloomberg reports.
The move “shows policy makers are concerned about the economic slowdown,” Zhang Bin, an economist with the Chinese Academy of Social Sciences, said in the article. “On the other hand, the government is trying to avoid all-out policy easing as it will jeopardize China’s much-needed economic restructuring.”
Additionally, the State Council plans to reduce social financing costs and maintain reasonable growth in credit and social financing in light of “relatively large” downward economic pressure. [Pessimistic Economic Outlook Weighs on Chinese Yuan ETFs]
“We expect more details to be announced next week on how the government rates the banks in terms of the share of their loans to the ‘real economy’ and how the size of the required reserve ratio cut will be linked to such a reduction,” Nomura Holdings said in a note. “The announcement enhances our conviction that policy easing should delay the risk of a hard landing to 2015.”
China’s economy is expected to expand 7.3% this year, its weakest pace since 1990. Premier Li Keqiang has stated that the government is shooting for a 7.5% growth target this year.