PETALING JAYA: Foreign fund inflows are expected to return in the third quarter of the year, driven by China’s Belt and Road Initiative, according to Rakuten Trade.
Its head of research Kenny Yee said that the boost will come from China’s infrastructure initiative in Malaysia and the Asean region, which includes the East Coast Rail Link (ECRL).
“We envisage China to be the saviour for drawing in foreign funds into the region,” he told reporters at a media briefing today.
According to him, the inflow will hinge on the spillover effect from the proposal to cut reserve ratio requirement (RRR) for China’s banking sector, which currently stands at 14.5% for large banks and 12.5% for smaller institutions. For every 1% cut in China’s RRR, US$120 billion (RM496 billion) is expected to flow into the system.
In addition, the gradual increase of foreign investors to China’s Morgan Stanley Capital International (MSCI) index from a current weighting of 5% to 20% starting in May 2019 will have a positive impact to Malaysia and the region.
Yee anticipates that this would draw US$80 billion foreign funds into China’s market and this would have a spillover effect on Malaysia and the region on the back of China’s Belt and Road Initiative.
“China is in for a positive ride ahead of its MSCI realignment and prospect of a RRR reduction, and the Asean region will benefit from the spillover effect,” he said.
In the near term, he does not expect much foreign inflows within the current quarter as there have not been any major market catalysts for Malaysia, although he views the government’s willingness to do business with China as a good indicator of what to expect over the next few months.
Meanwhile, Yee said there is no need for Bank Negara Malaysia to cut the Overnight Policy Rate (OPR) just yet, despite market talk that the central bank will reduce it by 25bps to 3% at the upcoming Monetary Policy Committee meeting next week.
“There are those who think that there will be a cut next month, others think that a reduction is due in July. We expect a later date,” he said.
Yee said if there is a reduction in the benchmark interest rate, the impact on banks will be minimal and could be offset by higher loan growth, especially with the revival of mega projects, particularly the ECRL and Bandar Malaysia, with a combined value of RM200 billion.
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