Last week, it was starting to look like a foregone conclusion that Beijing was set to step in aggressively to support the stock market.
Since the summer of 2015 when a vicious unwind in a half-dozen or so backdoor margin lending channels burst the Chinese equity bubble virtually overnight, Beijing has been keen on stepping in to arrest (figuratively and in some cases literally) any persistent weakness.
While the measures undertaken in 2015 were draconian in the extreme (e.g., arresting journalists, halting three quarters of the market, etc.), the “national team” (basically a collection of state-owned entities that buys stocks when the going gets rough) is still used regularly to put a floor under things.
Recently, more than a few folks have argued that 3,000 on the SHCOMP will be defended and indeed it was last week, when state-backed vehicles looked to have supported the market after a five-session slide. Here’s the big picture:
Last week’s RRR cut seems to have helped sentiment somewhat, but clearly, questions remain about the outlook for trade with the U.S. and, perhaps more importantly, what the ongoing push to deleverage the country’s shadow banking complex will entail for the real economy.
So that brings us to Tuesday and a statement from Beijing following a Politburo meeting. It looks like fiscal stimulus is in the cards here.
“The government will stick to a proactive fiscal policy and prudent and neutral monetary policy,” an account of the meeting reads.
“The Politburo statement mentioned the need to boost domestic demand for the first time since 2015, and dropped a reference to deleveraging, investors are interpreting the change in tone as a signal that the government may ease off tightening measures if warranted,” Bloomberg writes, in their take.
This was enough to juice the SHCOMP by the most in two months
Other mainland gauges similarly surged, with the ChiNext jumping more than 3%.
“The politburo meeting sends a signal that China may roll out fiscal stimulus and supportive monetary policies to resolve financial risk and stabilize markets should external demand weaken,” KGI Securities Ken Chen, told Bloomberg, adding that this “has boosted sentiment on the market, especially for blue chips.”
So there you go. Bailed out by Beijing. Although I guess the question here is the same as it always is. Namely, how do they plan to reconcile this with deleveraging? Or, more to the point vis-a-vis fiscal stimulus, aren’t they supposed to be purging excess capacity in an effort to cut down on shit like ghost cities, etc? Is fiscal stimulus really consistent with that?
Who knows and, at least as far as Tuesday goes, who cares?