To The Moon

On January 24th, the People's Bank of China announced a reduction in the reserve requirement ratio by 0.5 percentage points, scheduled to take effect on February 5th. This move is aimed at providing the market with long-term liquidity of approximately 1 trillion yuan. Additionally, on January 25th, the interest rates for re-lending and rediscounting to support agriculture and small businesses will be lowered by 0.25 percentage points.

Following the announcement, interbank interest rates and bond yields experienced a sharp decline. The yield on 10-year government bonds fell by 1.35 basis points to 2.49%. The Hang Seng Index initially rose, then retreated and rebounded, with market participants interpreting this as a certain degree of market approval.

Subsequently, several mutual funds urgently provided interpretations, stating that the central bank's reduction in the reserve requirement ratio exceeded market expectations in terms of timing and magnitude. This move is seen as a strong positive signal, demonstrating the commitment to coordinating monetary policy with fiscal efforts to support economic growth. The timely implementation of monetary policy is also beneficial for stabilizing market confidence, and the cost-effectiveness of equity assets is expected to become more apparent.

Exceeding Market Expectations in Timing and Magnitude

"This reserve requirement ratio cut is like a 'timely rain,' exceeding expectations in both timing and magnitude. It is beneficial for stabilizing market confidence, improving market expectations, and assisting economic recovery," said Da Cheng Fund. The 50 basis points reduction in the reserve requirement ratio is the largest in nearly two years, providing the market with long-term liquidity of about 1 trillion yuan. This will lower bank funding costs and, coupled with structural interest rate cuts (reduction in rates for re-lending and rediscounting from 2% to 1.75%), is expected to facilitate the downward movement of the Loan Prime Rate (LPR). This is not only conducive to reducing actual costs for enterprises but also helps alleviate the debt pressure on residents, boosting economic vitality.

What Signal is Being Released?

Bosera Fund stated that the reserve requirement ratio cut is $one(AONE.U)$ of the monetary policy tools to address insufficient economic demand. Considering the current economic and corporate profit situation, there were strong expectations in the market for monetary policy easing. This reserve requirement ratio cut is beneficial for stabilizing market expectations for monetary policy, reducing financing costs for financial institutions and the real economy, and contributing to the stabilization of the capital market.

Mutual Funds Optimistic about the Medium-Term Performance of the $Equity(EQR)$ Market

Looking ahead, several mutual funds believe that the medium-term performance of the equity market is worth anticipating.

Bosera Fund stated that the subsequent development of the stock market relies on the situation in the property market and its delivery, as well as the progress in controlling and digesting the production capacity in certain industries. These issues are expected to be resolved in the medium term, and considering the current valuation position of the market, they are optimistic about the medium-term performance.

Da Cheng Fund believes that looking ahead, as the future direction of the U.S. Federal Reserve's monetary policy shifts, objectively, it will also be conducive to expanding China's monetary policy space. Fiscal policy will also moderately coordinate efforts to address the current issues of insufficient domestic effective demand and weak social expectations. For the equity market, confidence will be restored, and the market is expected to significantly rebound.

How to Invest in China?

Investing in China can be done through Chinese stock ETFs. Chinese stock ETFs are funds that invest in Chinese companies, including index funds and specific category funds.

Below, we have selected 5 of the most liquid Chinese stock ETFs. We excluded leveraged ETFs due to the additional risks they bring, despite offering substantial returns.

The closing price of MCHI rose by 2.54% on Wednesday, while KWEB increased by 2.89%. These ETFs each manage assets of around $5 billion, and although they have experienced losses each year over the past three years, they have been severely impacted up to 2024.

After rising by 2.08% on Wednesday, CQQQ is still down 11% for the month. ASHR rose by 2.57% on Wednesday, but has fallen approximately 3% year-to-date. FXI gained nearly 3% on Wednesday but remains down 5% for the year.

Despite some gains in Chinese tech ETFs, ETFs investing in Chinese stocks are still in a downward trend in 2024. KWEB has fallen 10.2% year-to-date, while MCHI and FXI are down approximately 8% each.