On Thursday, in his “e-mail” to CNBC’s Joe Kernen, David Tepper flagged the slowing Chinese credit impulse among factors that have him cautious on markets.
The trade war came at a particularly inauspicious time for China as Beijing attempts to navigate the choppy waters around squeezing leverage out of the labyrinthine shadow banking complex while ensuring credit to the real economy isn’t choked off. Essentially, they are trying to de-leverage and re-leverage at the same time and the trade war makes that effort even more precarious than it already was.
On Friday, Beijing released a statement following the annual Economic Work Conference and it tips more tax cuts and drops the “neutral” language from the description of monetary policy. We won’t bore you with the details, but suffice to say China is tipping more fiscal and monetary easing. This comes just days after the PBoC rolled out a new “targeted” version of their MLF tool in an effort to get credit flowing to small businesses.
Long story short, nobody is going to care about this right now. Markets want something concrete and urgent. More RRR cuts are widely anticipated and it’s entirely possible that the policy rate itself is cut next year. Of course the risk is that more easing further undermines the yuan and pushes the bilateral rate beyond the dreaded 7 handle. Assuming that level proves to me more of a psychological barrier than anything else (i.e., assuming the threat of capital flight is more “fake news” than reality), it might not be a terrible idea to just let the currency go – even if it risks a “manipulator” label from Steve Mnuchin in 2019.
Friday’s hints at more stimulus came after the close on the mainland. The CSI 300 is now sitting at its lowest levels since March of 2016.
The gauge has fallen for six consecutive sessions.
The bottom line is that while China may be able to pull enough levers to keep the Titanic from crashing into one of myriad icebergs, the deceleration is unmistakable. And as the top pane in the chart below shows, the engine of global credit creation has stalled just as DM central banks are turning off the spigots.
Read more on how the trade war is complicating Beijing’s efforts to manage China’s economic deceleration