China needs to step up on monetary easing

This could revive growth.

In China, bearish macroeconomic data continue to add bullish momentum to the equity markets.

According to a research note from Credit Suisse, the Politburo meeting on 30 April attached strong emphasis on pro-growth measures to reverse downward pressure in the economy and called for higher intensity in policy support.

This provided a strong policy signal from the highest level of the Chinese leadership to shift policy priority to revive growth, not just to curb the downturn.

Credit Suisse expects another 25 bp policy rate cut and a 25–50 bp reserve requirement ratio (RRR) cut within the next three months, followed by further 50 bp cuts in policy rates by end–2015 and 100 bp cuts in the RRR over the next 12 months.

Here's more from Credit Suisse:

Innovative central bank policy to step up the usage of unconventional policy tools such as reverse repo windows and various liquidity-enhancing measures will reduce real market interest rates and lower financing costs in the economy.

Driven by monetary easing and accelerated capital market reforms, the Shanghai A-shares Index hit its highest level since 2008 and delivered a stellar 44% year-to-date (YTD) gain, making China the best-performing Asian market.

After Shanghai A-shares achieved a major technical breakout to surpass the previous highs on 22 May, we have changed our technical view on A-shares to positive from neutral and expect further strength in the market.

We see the A-shares euphoria as an asset bubble in the making, with the market’s 12-month forward P/E of 17.6 still staying at 50% below its 2007 peak of 35.1. Our investment strategy continues to focus on Hong Kong listed H-shares, Hong Kong blue chips and Hong Kong small and mid-cap growth stocks, which are priced at substantial discount to their A-share counterparts.

Priced at a 12- month forward P/E of 8.2 and a 19% discount to its 10-year average with a 5% dividend yield, H-shares (HSCEI) remain our most preferred vehicles to gain exposure to China’s reflation theme and capital-account liberalization.