On Monday, following a late-session rally in the Shanghai Composite, it was obvious the vaunted “national team” or other state-backed buyers were in play once the beleaguered benchmark hit 2016 lows. The SHCOMP’s closing low in 2016 was 2,655. Yesterday, when stocks hit that apparent line in the sand, “someone” engineered a rally.
That continued on Tuesday, with Chinese stocks rising further, buoyed by a weaker dollar following Trump’s renewed attacks on Jerome Powell, cautious optimism around trade, more state buying and signs that Beijing is stepping up with more stimulus.
According to the Shanghai Securities News, major Chinese insurance companies spent”at least billions of yuan” buying up shares in the onshore market on Monday. Additionally, an “unidentified large Chinese insurer” is said to have bought billions in A-shares whenever the SCHOMP fell below 2,700 over the last three trading days.
On top of that, China’s Ministry of Finance is now “suggesting” that the China Banking and Insurance Regulatory Commission slash the risk weighting for local government bonds to zero from 20% in an effort to supercharge LGF financing. That move amounts to fiscal stimulus and I guess is designed to promote spending on things like infrastructure.
Some observers are not particularly enamored with this approach. This is “another example of China reverting to the usual way of using debt financing to stimulate growth,”AllianceBernstein’s Brad Gibson told Bloomberg in an interview in Hong Kong on Tuesday.
Last week, Barclays was out with a sweeping note analyzing the current state of China’s tightrope walk that we’ve variously described as an effort to deleverage and releverage simultaneously. Here are a couple of excerpts from the bank’s note dated August 15:
In addition to the largely targeted easing measures rolled out in recent weeks, we think the government has room to do more, if necessary, including: 1) further monetary loosening through RRR cuts and OMO/MLF injections and lowering policy rates; 2) credit-supportive regulatory loosening, such as MPA parameter adjustments, partially unwinding tightening regulations on LG and shadow credit activity, and extending the transition period for asset management rules; and 3) fiscal expansion via accelerating planned/discretionary spending and tax cuts.
Under the scenario of ‘meaningful stimulus’ (which includes RRR cuts of 100bp in H2, material easing of LG financing, and an expansion of the augmented fiscal deficit to 10.3% of GDP from c.6% in H1), we expect credit growth to stabilise in Q4 18, while the credit impulse and infrastructure investment may bottom in Q3, supporting GDP growth of c.6.5-6.7%. Which scenario and policy mix will play out depends on policy efficacy, trade war impact, and the growth vs. deleveraging goal.
All of this comes amid a series of efforts to stabilize the yuan (reinstatement of forwards rules on August 3, the chiding of onshore banks for selling RMB on August 7, and a move to squeeze offshore liquidity on August 16). On Tuesday, the PBOC strengthened the reference rate by the most since July 26.
This move to stabilize the currency stems from two things, and it’s not entirely clear which is the more important consideration from the perspective of Beijing. The argument has generally been that China wouldn’t allow the yuan to weaken beyond ~6.95 or so as getting too close to the psychologically important 7-handle risks capital flight. But last month’s reserves data betrayed little in the way of evidence to support the contention that capital flight is about to pick up. So it could very well be that China has simply decided that having negated the effects of the first two rounds of U.S. 301-related tariffs (so, both the duties on $50 billion in goods and the prospective levies on an additional $200 billion in Chinese imports), they could go ahead and halt the yuan’s slide in an effort to guard against the contention that they’re manipulating the currency.
Keep in mind that this is all set against the backdrop of a resumption of trade talks in Washington this week and one of the Trump administration’s demands will apparently center around Treasury asking China to strengthen the yuan. In his interview with Reuters published on Monday, Trump accused China of currency manipulation (for the millionth time).
As we’ve been over more times than we care to recount, China has played this rather well when it comes to retaining plausible deniability on the manipulation issue. Thanks to hawkish Fed policy, the policy divergence between the U.S. and China has grown and that, in and of itself, would pressure the yuan without the PBoC doing anything. Throw in the fact that the threat of more trade frictions adds pressure to an economy that was already decelerating (China’s), and Beijing could quite feasibly argue that they are simply letting the market do its thing when it comes to the bilateral rate.
That said, when you have a managed currency, doing nothing is tantamount to doing something.
And on that note, we’ll leave you with some amusing commentary from Nomura’s Charlie McElligott, who annotated some of the headlines out on Tuesday about the yuan.
In statements today that would have made the old ‘Iraqi Minister of Information’ from the Gulf-War days blush, the PBoC’s Director of Monetary Policy said the following:
- PBOC: CONFIDENT OF KEEPING YUAN STABLE AT EQUILIBRIUM LEVELS (so you’re intervening, obviously)
- YUAN EXCHANGE RATE IS DECIDED BY MARKET: PBOC OFFICIAL LI BO (but you just said you’re intervening?)
- CHINA WON’T USE YUAN RATE AS TOOL IN TRADE TENSIONS: PBOC (riiiiiiiiiiiight)
- PBOC TOOK COUNTER-CYCLICAL MOVES TO STABILIZE FX MKT: OFFICIAL (repeat step 1)