Executive summary:
- Manufacturing rebounds in China
- Chinese economic growth likely to be key focus at NPC meeting
- Bank of Japan may move away from yield-curve control
On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Equity Manager Research Analyst Michelle Batjargal discussed recent PMI (purchasing managers' index) readings from Asia, as well as expectations for China's upcoming National People's Congress (NPC) meeting. They also chatted about the appointment of Kazuo Ueda as the next governor of the Bank of Japan (BoJ), and what the implications of this might be for the country's monetary policy.
Is China's economy recovering quickly from lockdowns?
Cousley and Batjargal kicked off the segment with a look at recently released PMI numbers from China, which Cousley said were robust. In February, China's National Bureau of Statistics reported that the PMI for the manufacturing sector rose to a level of 52.6, which Cousley characterized as a very strong bounce.
"China is in the process of reopening its economy after years of COVID-19 lockdowns. In addition, the country's manufacturing sector was shut down for the Lunar New Year in late January and early February. These latest numbers show that China's economy is starting to recover pretty quickly following the reopening impulse and resumption of manufacturing activity," he stated.
Zooming out more broadly across Asia, Cousley said that PMIs in the region were generally pretty modest, with the manufacturing PMI dipping slightly in India, while Taiwan's manufacturing PMI rose but remained below 50. A PMI greater than 50 indicates expansionary conditions, and a PMI below 50 indicates contractionary conditions, he said, adding that South Korea's PMI also came in slightly under 50.
"I think we'll see South Korea, Taiwan and, to a lesser extent, India, get a bit of a boost from China's reopening impulse,” Cousley remarked, adding that he expects demand for semiconductors to also increase.
What to expect at China's NPC meeting
Batjargal next asked Cousley for expectations and insights ahead of China’s NPC meeting, which begins March 5. “One key focus is going to be on leadership changes, with Li Qiang expected to be confirmed as premier,” Cousley said, explaining that the premier is the official responsible for economic policy. Qiang is known as fairly business-friendly, he added.
Cousley said that the agenda for the meeting is likely to focus on achieving strong economic growth for China in the year ahead. It will be particularly interesting, he said, to see what stimulus plans might be in the pipeline to support consumers. “It’s important for China to have a strong consumer, because the other main drivers of growth—net exports and the housing sector—aren’t expected to do particularly well this year, due to the slowdown in the global economy,” Cousley remarked.
The other aspect of the NPC meeting that should be interesting will be the expected focus on the digital economy, he said. Cousley explained that China is putting a lot of money into AI (artificial intelligence), robotics and cloud computing—especially in light of the U.S. CHIPS Act and semiconductor sanctions put in place by the U.S. How China deals with all of this, and how much money it pours into the digital economy, will be important watchpoints, he said.
How could BoJ policy shift under Kazuo Ueda?
Cousley and Batjargal wrapped up the segment by turning their attention to Japan, where Kazuo Ueda was recently nominated to be the next governor of the Bank of Japan (BoJ). Cousley said that Ueda is expected to replace the current governor, Haruhiko Kuroda, in April. Ueda was a surprise pick, he noted, beating out three other frontrunners for the nomination.
Investors will be paying close attention to whether Ueda makes changes to some of the BoJ’s monetary policies, Cousley said, including its interest rate policy and yield-curve control program. Currently, the central bank’s cash rate sits at -0.1%, he explained, while its tolerance range for the yield on the 10-year government bond is capped at 0.5%. In December, the cap on the benchmark yield was raised from 0.25% to 0.5%, Cousley added, explaining that the BoJ currently buys as many bonds as necessary to maintain this yield.
He said that looking ahead, a key focus for the bank will be the spring wage negotiations, known as shuntō. If wage pressures increase, Cousley said he expects to see the BoJ take some steps away from its ultra-accommodate monetary policy. However, in his opinion, it’s very unlikely that Ueda would alter the bank’s negative interest-rate policy. Rather, any potential changes would likely be to the BoJ’s yield-curve control program, and would probably happen slowly, Cousley said.
“I think we’re going to see a gradual move away from yield-curve control. There was some speculation in the market a few months ago that it would be taken completely away in one go, but Ueda’s recent remarks suggest that he wants to do this very gradually,” he explained.
As for the implications of this on global yields, Cousley noted that while Japan has been a big buyer of foreign government bonds over the past 20 years, the BoJ has already begun selling some U.S. and global Treasuries as rising rates have led to an uptick in hedging costs. “Overall, I anticipate a small pickup in pressure on global yields as a result, but I expect it to be pretty modest, given the backdrop of global recessionary risks,” he concluded.
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