If you were concerned that Tencent and Alibaba were shouldering a disproportionate share of the burden when it comes to the MSCI China, you can rest easy because apparently, all it takes is one targeted RRR cut to make everyone completely forget about the ongoing effort to rein in leverage in China’s financial system.
Over the weekend, the PBoC announced an RRR cut for some banks contingent upon their lending to small businesses. It’s pretty straightforward as these things go: if you lend more than 1.5% of your new loans in 2017 or 1.5% of your total loans at end- 2017 to these small business, you get a 50bp cut and if you lend more than 10% of your new loans in 2017 or 10% of your total loans at end- 2017 to small businesses, you get an additional 100bp cut. I know! Sweet ass, right?!
No, but seriously, this is just an effort to offset the tightening engendered by macro prudential measures designed to guard against systemic risks and to the extent we can differentiate between counter measures and overt easing, this is probably more akin to the former. Think about the timing. Here’s SocGen:
On 1 January 2018 — the time of the RRR cuts, the financial system and the economy will be facing several forces of tightening.
- To financial institutions, the scheduled RRR cuts will serve to offset a potential liquidity shock resulted from further financial deleveraging measures. The PBoC is already set to include banks’ interbank borrowing in the macro-prudential assessment (MPA) starting 2018, so as to add pressure on banks to scale back their financial leverage. There may be more financial regulations in the coming months. A big liquidity injection will probably be needed to allow the PBoC to keep interbank interest rates within their current ranges, which is the technical definition of no change in the monetary policy stance.
- The real economy will need some credit assistance to weather the anti-pollution campaign, which will likely cause severe disruptions to industrial production and construction activities in the next six months. While large enterprises may have sufficient cash flows to weather the supply shock, small companies are likely to need financial assistance. The conditionality attached to the cuts and the three month gap between the announcement and implementation should increase banks’ incentive to lend more support to those in need
In other words: it’s not an accident that this goes into effect in 2018. This is deliberately designed to be an offset and if you want to know why they didn’t just go ahead and implement an across-the-board RRR cut, the answer is simple: it sends the “wrong” message at a time when the “right” message is centered on de-risking the system.
See? This really isn’t all that complicated.
Of course markets will be markets and by God, they’re lovin’ it. Mainland markets are closed, but the Hang Seng China Enterprises Index rose 0.8% in Hong Kong, taking its 3-day gain to 4.8%:
The Hang Seng itself was up again, bringing its 3-day gain to something like 3.5% – it’s sitting at the highest level since April 2015.
Getting back to the point made here at the outset, financials are on fire. Look at ICBC for instance:
Here’s a little color on this from Bloomberg:
With just two stocks — Tencent Holdings Ltd. and Alibaba Group Holding Ltd. — accounting for almost half the 46 percent advance by the MSCI gauge this year, the index is increasingly vulnerable to any reversal in tech companies. Such a risk was highlighted just last week when a global technology selloff helped drag the MSCI China Index down as much as 3 percent in just one day.
The divergent performance is even more marked when compared against the MSCI China’s previous peak in April 2015. While gauges of property and technology shares have surged more than 60 percent since then, six of the 10 industry groups are still underwater. Financials are 16 percent lower, while energy and industrial shares are more than 30 percent below.
I’d curb my enthusiasm if I were you (assuming you were super-excited). Because the story hasn’t changed here – at all. This is still the same tightrope walk between reducing systemic risk by squeezing leverage out of the system while ensuring any tightening is targeted enough not to impact credit to the real economy.
Indeed, the fact that they felt it necessary to announce this RRR cut ahead of time and set the implementation date to coincide with measures that will almost invariably tighten the screws, underscores the fact the PBoC is fully aware of how precarious a situation this is.
That said, being aware is infinitely better than being oblivious.