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China Growth Picks up as Stimulus Takes Hold
China Growth Picks up as Stimulus Takes Hold. This publication is a new regular report focusing on macro developments in China relevant to investors across asset classes and markets.
- China steps up monetary and fiscal stimulus, marking a key policy turning point
- The People’s Bank of China (PBoC) cuts reserve ratios for small and rural banks
- Data releases over the past months indicate stimulus policies are starting to have an impact
- Structural reform remains high on the policy agenda, but growth takes precedenc
China steps up monetary and fiscal stimulus, marking a key policy turning point. Over the past month a number of fiscal and monetary policy initiatives and speeches by senior leaders has made it clear that China will “do whatever it takes” to ensure growth stays in the 7%-8% range, with the upper half of the range preferred. We believe growth bottomed in Q1, with a relatively robust rebound in store in H2, marking a key economic turning point after three years of slowdown.
The People’s Bank of China (PBoC) cuts reserve ratios for small and rural banks, adding monetary stimulus to the fiscal stimulus already announced earlier this year. While in of themselves the cuts are unlikely to be highly stimulative, they signal the government is serious about improving credit conditions for certain segments of the economy, including rural areas and small enterprises. Remarks by PBOC officials indicate that targeted credit easing is now being encouraged.
Data releases over the past months indicate stimulus policies are starting to have an impact. Industrial production, retail sales, loan growth, fixed asset investment, exports and inflation have all picked up over the past two months, and we anticipate further gains in H2 2014.
Structural reform remains high on the policy agenda, but growth takes precedence. The clampdown on corruption and non-productive lending, the move to a true market-driven economy, improvement in environmental standards, and improved land rights for rural citizens remain key goals of the government. However, maintaining strong employment growth and social stability will take priority if there are short term conflicts between the two agendas – as there have been recently.
STIMULUS MARKS POLICY TURNING POINT
We expect China economic growth to pick up in the second half of the year, supported by loosening fiscal and monetary policy as well as improving external demand. China’s Premier has made it clear that he will do ”whatever it takes” (to paraphrase Mario Draghi) in order to maintain economic growth close to 7.5%, a level considered necessary to maintain full employment and social stability. In addition to the fiscal loosening announced earlier this year, monetary easing has now started earlier than most analysts expected.
Reserve requirement rate cut
The People’s Bank of China (PBoC) cut the reserve requirement ratio for small and rural banks by 50bps, effective June 16th. The announced cuts are in addition to the 50-200bps reserve ratio cuts for rural banks in April 2014. The cuts have been limited and carefully targeted, leaving plenty of dry-powder for deeper and broader cuts down the line. The cuts are also in line with the longer term moves to liberalise the banking system through gradual deposit interest rate liberalisation and bank consolidation.
Estimates of how much new liquidity the moves will inject vary from 95 billion Yuan to 50 billion Yuan. The change in the reserve ratio will apply to approximately two thirds of city commercial banks, 80% of non-county level rural commercial banks and 90% of non-county level rural cooperative banks.
Monetary and credit growth appears to be responding positvely to the cuts in the reserve ratios for rural banks earlier this year.
Potential changes to the loan-to-deposit ratio
The Deputy Chairman of China’s banking regulator, Wang Zhaoxin, said on 6 June that the regulator is considering adjusting the calculation of loan-to-deposit ratios (LDR). Many banks have hit the 75% cap and therefore their capacity to lend is constrained. It is expected that over the medium term, China will move to a liquidity-at-risk framework, eliminating the LDR requirement. But that would require a change in the Commercial Bank Law. For now, it is likely the changes will entail excluding certain types of loans from the calculation to allow banks to lend more freely, especially to small-to-medium sized companies.
Two-way currency risk maintained
The PBoC allowed the renminbi appreciate by 0.6% in the first half of June, defying those who thought the country had switched to currency depreciation strategy. The authorities have been at pains to introduce two-way currency risk to encourage better market discipline and prepare the country for further financial and currency market liberalisation. In our view, with the balance of payments still in regular surplus, reserves continuing to accumulate and the government actively encouraging a shifting emphasis from external to domestic-led growth and a continued move up the value-added chain, the renminbi will maintain a medium-term appreciation trend.
Local government financing reform being eased in
Following abuses in the early 90’s, local governments have been largely excluded from issuing bonds, with bank loans the main source of financing. However, reform is now being introduced, with the government stepping up its efforts to develop the municipal bond markets (with encouragement from the IMF) in order to increase transparency and reduce the growing reliance on hard to measure and control “shadow-banking” financing vehicles.
While the full development of a municipal bond market is some way off, the Ministry of Finance has been issuing bonds on behalf of local governments and some local governments are able to issue bonds within a quota. A total of 10 local governments can issue bonds with Beijing, Jiangxi, Ningxia and Qingdao being added to the list last month. The Ministry of Finance last week introduced the requirement that local governments must obtain credit ratings to issue bonds in a bid to bolster credit risk management. Last week the Ministry auctioned 51.6bn Yuan (US$8.3bn) worth of 3 and 5 year local government bonds.
Local government’s role in achieving targets reaffirmed
Premier Li Keqiang pressed local leaders last month to help the economy achieve its annual growth target. Li reminded local leaders of their “inescapable responsibility” to achieve this year’s economic targets and stressed that “no delay in action is allowed”.
Real economy responding to fiscal stimulus
Last month the State Council announced it will boost public investment in railway, highway, waterways, and aviation-network construction in the Yangtze River basin and cut some utility companies’ taxes by a total of about 24bn Yuan (US$3.9bn) a year. That will be positive for growth this year.
The real economy is already beginning to respond to the stimulus put in place earlier this year with industrial production, retail sales, loan growth, fixed asset investment, exports and inflation all rising and coming in higher than consensus expectations this month.
Investor sentiment is starting to improve
Recent actions and statements by key government officials and policy-makers make it clear that China will continue to pursue its reform agenda – at a more moderate pace if necessary – while loosening fiscal and monetary policy in order to reverse the three year economic slowdown. With economic data becoming more consistently positive and the government’s easing stance becoming more transparent, the China’s local A share market has started to trend higher. As one of the world’s cheapest equity markets, we believe that if the current policy stance continues and growth rebounds in H2, China domestic equity markets are in a position to outperform.
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).
The impact of US tariffs continues to dominate market sentiment and risk assets, including crypto, struggled with this uncertainty throughout the month. The Nasdaq Crypto Index™ (NCI™) fell 4.46% in March as the S&P 500 and Nasdaq 100 dropped 5.63% and 7.61%, respectively.
Despite the macro uncertainty from Washington, US policymakers are continuing to embrace crypto in an unprecedented way, including launching a Bitcoin Strategic Reserve, Digital Asset Stockpile, and engaging in expansive work at the regulatory agencies and in Congress.
Our team spent the last week of the month in Washington, meeting with regulators to share our experiences and views on what’s most important for crypto investors in the US. In his latest Notes from the CIO, Samir Kerbage shares what he learned from these meetings and how investors should be thinking about the new regulatory regime in the US.
As always, we are greatly appreciative of your trust in us and are here to answer any questions you may have.
-Your Partners at Hashdex
Market Review
March was marked by the tariff dispute triggered by the Trump administration. Back-and-forth fiscal policies, threats, and retaliations dominated the month’s agenda. The uncertain macroeconomic environment put investors into a defensive stance and negatively impacted crypto assets. The Nasdaq Crypto Index™ (NCI™) closed the month down -4.46% after a period of high volatility. Major market indices, the S&P 500 and Nasdaq-100, also recorded steep declines of -5.63% and -7.61%, respectively. These concurrent drawdowns across equities and crypto underscored March’s broad market caution, as trade war uncertainty prompted investors to flee risk assets.
During times of uncertainty, it is common to observe increased correlation among different classes of risk assets. This pattern played out in March: the 6-month rolling correlation of monthly returns between the NCI™ and the Nasdaq-100 surged to roughly 0.91 (see chart below), its highest level since 2021, indicating that crypto assets were moving almost in lockstep with tech stocks. This spike in correlation confirms that crypto was behaving like a high-beta extension of the tech sector—an amplified version of the Nasdaq-100. The lack of clarity in the global landscape leads investors to reduce their risk exposure and seek protection, a movement known in financial markets as “risk-off” allocation.
6-Month Rolling Correlation of Monthly Returns between the Nasdaq Crypto Index and Nasdaq-100 (Apr 2021–Apr 2025).
The chart illustrates how this correlation has been increasing since the American elections in November 2024 and spiked to approximately 0.91 in the most recent period—a multi-year high. This visual evidence reinforces the view that crypto assets have been moving closely in tandem with tech stocks, effectively acting as a high-beta version of the Nasdaq-100 during the March risk-off phase.
Following this trend, risk reduction was evident within the crypto asset class. Among the NCI’s constituents, Bitcoin (BTC) posted a decline of -1.93%, withstanding the downturn far better than other constituents such as Ether (ETH, -17.4%) and Litecoin (LTC, -34.6%). BTC’s relatively mild drop in this sell-off aligns with the idea that it increasingly trades like a high-beta proxy for large-cap tech. It still declined, but less severely, whereas smaller-cap crypto assets behaved more like speculative growth stocks and suffered outsized losses. The only exception to the negative results was Cardano (ADA), which surprised with a positive return of 3.88% despite no significant protocol developments during the month.
Thematic indices also faced a challenging environment. As highlighted in previous letters, smaller capitalization assets tend to suffer more during periods of market stress, mirroring how speculative small-cap stocks are hit hardest in equity sell-offs. The biggest negative highlight was the Digital Culture Index, which dropped -17.45%, followed by the Decentralized Finance (DeFi) and Smart Contract Platform (Web3) indices, which fell -16.73% and -12.07%, respectively. The Vinter Hashdex Risk Parity Momentum Index recorded a negative result of -8.26% but outperformed the three other thematic indices, benefiting from its high allocation in BTC and TRX (which gained 4.68%). The heavy weighting in BTC – the more resilient large-cap crypto – helped cushion this index, underscoring the relevance of the momentum factor in a well-diversified strategy during times of market stress.
The market remains on the lookout for the outcome of the fiscal policy discussions, hoping for a reduction in uncertainties and an end to the tariff war. That would likely mark the moment when investors regain their appetite for risk assets, including crypto assets. The U.S. government has also signaled interest in advancing the crypto agenda, a development that could drive the asset class to a new level of adoption. We remain confident in our positive outlook for the rest of the year and the long term.
Top Stories
US creates Bitcoin Strategic Reserve and Digital Asset Stockpile
The Bitcoin Reserve will be capitalized with BTC owned by the Department of Treasury, which could further increase via new budget-neutral acquisitions. The stockpile will also include assets owned by the Treasury. This marks a major milestone, with the US government starting to integrate major crypto assets and continues the new administration’s work to lead the global crypto economy.
Stablecoins surpass $230 billion in market value
The total stablecoins market capitalization surpassed $230 billion amid institutional demand for dollar-backed digital assets. This showcases one of the most successful applications for crypto technology enhancing traditional financial payments. It could also pave the way for new use cases that require a strong and reliable global payment system.
FDIC eases banks’ ability to engage in crypto activities
The FDIC has rescinded previous guidelines which prevented financial institutions from engaging with crypto activities without prior sign-off. By removing bureaucratic hurdles, banks may more readily over crypto-related services, potentially leading to broader adoption and integration of digital assets into the financial system.
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