Minutes after China reported an across-the-board beat on GDP, retail sales and IP, thereby ostensibly “confirming” that the engine of global growth has stopped decelerating, market participants raised a new worry: Now that things have stabilized, Beijing may put the brakes on the stimulus push.
This is something we’ve warned about for months. All year, optimists hoping for an honest-to-God global “melt-up” in risk assets were hanging their hat on a “kitchen sink” type stimulus push from Beijing. That, despite the fact that Chinese officials have gone out of their way to insist they would be some semblance of prudent when it comes to not resorting to measures that amount to “flooding” (as they’re fond of putting it).
One lingering concern over the past four months has centered around the notion that the data might come in just good enough to “confirm” stabilization, but not good enough to give the all-clear signal on the global economy. In that scenario, there’s a risk that China will pull back on stimulus (both monetary and fiscal), content to adopt a wait-and-see approach. Because the global economy depends so much on China’s credit cycle, the prospect of a piecemeal strategy to stimulus in the face of stabilizing (but not great) data is seen as something of a risk factor. A similar narrative has been advanced with regard to China’s equity rally. If the rally runs too far, too fast, some say it could cause Beijing to rethink more RRR cuts and tighten liquidity in the interest of avoiding a bubble à la 2015.
“Monster data and China stocks are weakening?!”, an incredulous Mark Cudmore (a former FX trader) shrieked on Wednesday, just after the activity data crossed, before delivering a scathing rebuke of the narrative outlined above as follows:
The explanation seems to be that this data was so good that China policy makers won’t implement many more stimulus measures. Fine, the economy has no need for any extra help right now –it’s doing excellently and asset markets have much room to rise. The argument that things are so good that no extra support will come is a very poor case to be bearish. The data is clear and shouldn’t be fought against for now. Policy makers are likely to return rapidly to the fray to support the economy and assets at the first sign of sustained trouble. Fighting fundamentals is a mug’s game in the long-term.
All of that – every, single last bit of it – is unequivocally true. But markets will be markets and in today’s world, where all that matters are the “flow” effect of incremental liquidity injections (call it an opioid drip) and the psychological comfort that goes along with governments dropping daily hints of more fiscal measures, there are only two ways for good news to actually be good news: 1) it has to be so undeniably great that it tips an imminent melt-up of its own accord, or 2) central banks need to have pre-committed to a dovish policy path irrespective of how the data evolves. The latter is true for developed markets right now (more on that dynamic here).
Well, it turns out folks needn’t worry just yet. Because according to the ubiquitous “people familiar with the matter”, China is busy working on more stimulus measures to boost consumption.
You might recall that last week’s better-than-expected exports data was accompanied by less inspiring imports figures, which, for some, raised questions about the durability of the domestic economy. Consumption is critical right now considering the extent to which trade tensions have dented external demand, and while a deal with Trump does appear to be close, tensions will remain and global trade is expected to stay subdued for the foreseeable future.
And so, China will do several things, apparently.
For one, Caixin reported Wednesday that Beijing is pondering a plan to relax controls over new car licenses in major cities. That’s according to a NDRC document that was widely circulated on Chinese social media. Specifically, the body is planning to up the number of newly issued car licenses in cities that include Beijing and Shanghai by 50% this year, and double that in 2020, versus 2018 levels. The plan also includes subsidies for alternative energy vehicles and the installation of charging stations.
This of course comes at a time when auto sales are in a tailspin in the world’s largest market.
The measures aimed at supporting that flagging market look like an aggressive step to help ameliorate the effects of quotas designed to curb traffic and pollution.
As you might imagine, European autos got a big boost from this news on Wednesday, as did some domestic carmakers in China. The SXAP has had a stellar 2019 despite lingering threats that Trump will slap car tariffs on Europe. The gauge is gunning for a fourth consecutive weekly gain.
In addition to the above, Bloomberg has further details which suggest this is part of a broader stimulus push that will include subsidies for everything from smartphones to appliances, with the latter eligible for a 13% helping hand from the government. If the plan is in fact implemented, Chinese will enjoy subsidized phone trade-ins, a bid to shore up the smartphone industry following a near 10% drop in shipments during Q4.
“The proposals are at a consultation stage with other government branches, and there is no guarantee that they’ll be approved”, sources said. The usual faxed request for comment wasn’t returned.
So, if you were concerned that the stabilization in the economy was going to prompt Beijing to slam on the brakes when it comes to the stimulus push, the answer would appear to be no – at least on the fiscal front.
And that might be the best way to go about things considering the very real possibility that confidence and, in turn, demand for credit is the problem, not credit supply.
