Predictably, there were more stimulus hints/promises out of China overnight, a day after trade data for December continued to suggest the domestic economy is faltering.
With the front-loading effects now squarely in the rearview and both the official and Caixin PMIs in contraction, the cacophony of stimulus banter is likely to get even louder.
Tuesday brought news that China will cut taxes for small companies and the manufacturing sector, will increase the size of local government special bonds and will seek to support infrastructure projects. That’s all according to a statement from the Ministry of Finance. The tax cut promise came with a “on a larger scale” kicker that I guess is supposed to give it some additional market-boosting prowess.
These fiscal stimulus hints are now a weekly thing. It’s never ending. It feels like every morning the market wakes up to another amorphous pledge from Beijing and while China does have at its disposal a seemingly endless bag of tricks, some contend their capacity to “kitchen-sink” it is limited. “We think expectations of aggressive fiscal policy and tax cuts may be misplaced”, Barclays wrote last week, in a piece aptly entitled “Constraints of proactive fiscal policy.”
“We argue that China’s fiscal space is constrained by legacy issues arising from the extraordinarily expansionary policy in the last downcycle, a deteriorating fiscal position, and elevated contingent liabilities, including future pension costs”, the bank goes on to caution.
Whatever the case, Tuesday’s soundbites were good enough to promptly erase yesterday’s trade data-related equity losses. Hong Kong led the way higher, with both the Hang Seng and H-shares rallying more than 2%. Both snapped multi-session win streaks on Monday.
(Bloomberg)
Onshore, the SHCOMP and the CSI 300 logged solid gains.
(Bloomberg)
Ultimately, it was an across-the-board good day for regional markets. For reference, here’s how things are stacking up in 2019 for Asian benchmarks coming off an abysmal 2018.
(Bloomberg)
Meanwhile, China’s December credit growth data beat estimates, a welcome sign that, on a generous interpretation, suggests stimulus is starting to “work”.
Again, there are a ton of ways you can parse this, but the headlines are seemingly upbeat, as TSF, new yuan loans and M2 growth all came in solid, printing CNY1.59 trillion (est. 1.3 trillion), CNY1.1 trillion (est. 825 billion), and +8.1% (versus 8% in November), respectively.
(Bloomberg)
A charitable read is that incremental measures to boost lending and ensure that the deleveraging push doesn’t choke off credit to the real economy are “working”, but there are still a lot of questions about just how effective RRR cuts (for instance) are going to be going forward if banks are simply loath to take risks.
In any event, the tax cut pledges and tired promises of stepped-up fiscal stimulus were enough to buoy risk appetite in Asia for a day. We’ll see what the half-life is.
Always remember (always, always) that underlying everything the Party does (and doesn”t do) is predicated on a single (albeit tacit) agreement between it and the people of China: “we wil look after you and ensure you enjoy a steadily rising standard of living and quality of life. In return you will forego all your civil rights and refrain from criticizing the Party.” If the actions of the Party (and the people) are viewed through this prism, they become (almost) perfectly understandable.
We here in the United States are unfamiliar with this concept. Ever better bread and circuses coinciding with ever diminishing civil liberties and an unresponsive ruling Party? Barbarism.
Normally, when countries are demographically “young” (average age, retiree-to-worker ratio) they are “poor” (per capita wealth/income). As they age, they get richer. Kind of like people, one hopes.
Japan is an example of old but rich, hence they have a high standard of living despite high average age and higher retiree-to-worker ratio. Some Western European countries are other examples.
The US is a fortunate example of rich but not yet old. This is due partly to immigration, also to factors that encourage larger families.
China is an unfortunate example of not-yet-rich but getting-old-rapidly. This is due in part to the misguided One Child policy. So the Chinese government knows the country is in a desperate race to get rich before it gets old. Hence the driving focus on economic growth above all else.
Investors shouldn’t invest on demographics – hardly anyone’s investment horizon is that long – but long-horizon governments with presidents “for life” can’t afford to ignore demographics.