In China: Car Trouble And Plunging Bank Shares

On Thursday, China managed to report decent October trade data, a relief considering how concerned market participants now are about the prospects of a synchronized global slowdown.

Thursday’s numbers came a week after a string of poor PMI data (in China and elsewhere) sounded the alarm bells on a global economy that looks to finally be buckling under the pressure of Fed hikes, late cycle concerns and, perhaps just as important, trade tensions.

Save an obligatory nod to slowing business spending, the Fed showed no signs it’s prepared to relent in Thursday’s short statement. “In just 272 words, the Fed just told us all systems are a go to get to neutral, soft capex and lower TIPS breakevens be damned”, David Rosenberg quipped after the decision. “3% funds (or higher), here we come!”, he added, before advising everybody to “stay liquid.”

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Fast forward to Friday and mainland shares in China were pummeled on a string of disconcerting news. Banks led the drop after Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, said at least 1/3 of big banks’ new loans should go towards bolstering private enterprise. That’s part of Beijing’s ongoing efforts to support private companies amid the economic downturn and plunging equity market, but it didn’t sit well with banks, whose private loans now account for less than a quarter of outstanding debt.

Industrial & Commercial Bank of China dove 3.25%, the most since October 8 and the ninth worst day of 2018.


Long story short, the move was seen as a sign of panic among market participants. Still CSI financials “only” fell 2.2% on the session, which I suppose isn’t a complete debacle.

That wasn’t the only sore spot on Friday. Auto sales disappointed again, falling for a fifth straight month, the China Passenger Car Association said Thursday. Specifically, retail sales of sedans, multi-purpose vehicles and SUVs dove 13.2% last month.

That is a “big league” problem, especially considering that Trump’s trade war has already dented sentiment for the global auto market. China has cut import duties this year in an effort to placate critics and demonstrate a commitment to opening up, at the expense of local automakers. Hong Kong-listed shares of Geely, Brilliance China Automotive and Great Wall Motor are an absolute horror show this year.


Late last month, Goldman lowered their auto demand growth forecast for China to -3% YoY, from +2%, noting a widening gap between output and retail sales. “We now see risk of an inventory correction from year-end through the start of 2019”, the bank wrote on October 31.



On the “bright” side for Chinese shares, the Shanghai Composite’s losing streak (which extended to a fifth consecutive session on Friday), hasn’t been accompanied by the kind of harrowing swings that accompanied last month’s pain. Friday was the only session amid the five-day slide that saw the SHCOMP fall more than 1%.


Finally, note that the PBoC’s Yi Gang spoke at a conference in Budapest on Friday. His message: policy normalization from developed market central banks and trade tensions are the main threats to the global economy.

In other words: The main threats are Jerome Powell and Donald Trump, which is supremely ironic because last month, when asked who his “biggest threat” was, Trump said “the Fed”.

Nothing further.


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