Monetary policy, markets seen stable this year despite Fed Reserve actions

Although China will not be completely immune to the global market's higher volatility this year due to recent US Federal Reserve tightening, China's monetary policy and its capital market will be relatively stable compared to other markets given the country's firmer economic recovery outlook, said experts.

Officials from the Fed expect higher interest rates to remain in place until the country's inflation is on a sustained downward path to 2 percent, according to minutes released on Wednesday from the Fed's December meeting.

The minutes noted that no Federal Open Market Committee members expect rate cuts in 2023.

The Fed's anti-inflationary stance derives from the lack of wiggle room left for it to adjust its monetary policies, especially during the first six months of this year, said Ethan Wang, head of investment strategy for wealth management at Standard Chartered China.

Using Standard Chartered's calculations, the interest rate in the United States is likely to touch 5.25 percent according to the bank's highest estimation, and is likely to drop to 4.5 percent by the end of this year.

While interest rates will remain high in the US, any hike levels will likely be lower. In this sense, the US dollar will weaken, which will be translated into capital inflows into emerging markets, said Wang.

Fed tightening and the likelihood of contracted consumption may lead to economic recession in the US. Therefore, Standard Chartered holds an underweight rating on US stocks. But it holds an overweight rating on Asian equities excluding Japan, mainly as A-share company profitability will improve amid China's economic recovery, explained Wang.

Xu Mingqi, a researcher at the Shanghai Academy of Social Sciences, said that the Chinese financial market this year — one growing in global importance — will show higher volatility due to some economies' solvency difficulties after rounds of interest rate hikes.

But China will continue to adopt a stable and relatively relaxed monetary policy this year, with more room for further adjustment compared with 2022, said Lian Ping, chief economist at Zhixin Investment.

China's economic recovery is likely with its GDP growth expected to reach 5 percent, Lian said. Inflation will be less steep in 2023, which provides room for further monetary easing in China. The anticipated slowdown in US monetary tightening will also point to the possibility of further relaxation in China, including lowering the reserve requirement ratio when necessary.

Shao Yu, chief economist at Orient Securities, said that a relaxed policy environment in China and further tightening elsewhere may be the theme affecting the capital market in 2023. The Chinese stock market will embrace opportunities against such a backdrop.

China's economic recovery, which will be bolstered by further optimized COVID-19 control measures and stimulus packages, will provide an ideal investment environment for Chinese shares. The investment value of Chinese equities is especially noticeable in light of relaxed liquidity and companies' improved profitability, Shao said.

Experts' confidence in Chinese assets is proven by the A-share market's bullish performance on Thursday. The benchmark Shanghai Composite Index gained 1.01 percent to close at 3155.22 while the Shenzhen Component Index jumped 2.13 percent to close at 11332.01. The technology-focused ChiNext in Shenzhen soared 2.76 percent.

Likewise, US-listed Chinese companies rallied on Wednesday, with the Nasdaq Golden Dragon China Index — a tracker of Chinese companies trading on US exchanges — closing 8.57 percent higher.