As onshore shares in China surged ~40% in 2019, some analysts began to suspect the rally would become a victim of its own success.
Although ensuring ample liquidity is critical at a time when the fate of the global cycle hinges to a great degree on whether China’s economy inflects sustainably for the better, opening the floodgates when domestic equities have already run as far as they have risks a repeat of the 2015 crash, something authorities are keen to a avoid.
Well, on Monday, Chinese stocks had one of their worst sessions of the year, as the CSI 300 dove some 2.3%. Property developers, consumer discretionary names, banks and industrials were all hit.
The proximate cause: A Politburo statement which suggested the economy has now stabilized enough to allow Beijing to ease off the stimulus.
Last week’s big news on the global economic front was China’s activity data, which beat across-the-board. While some of the March figures were chalked up to holiday distortions and seasonal factors, better-than-expected Q1 GDP was seen as validating the “stabilization” narrative. The data immediately raised concerns that China is now subject to the “good news is bad news” paradox, where upbeat economic data is negative for markets as it suggests stimulus will be less aggressive.
Hours after the data hit, the rumor mill was alive with reports that Beijing was set to relax controls over new car licenses in major cities, part of a broader stimulus push that would include subsidies for everything from smartphones to appliances.
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But the Politburo statement which served as the impetus for Monday’s selloff appears to have negated any good vibes emanating from the latest fiscal stimulus hints.
“The statement mentioned the term ‘structural deleveraging’ which first appeared this time last year but has been absent in policy statements since then”, Goldman wrote Monday, adding that there was “no mention of the need to boost consumption.”
“In recent days there has been speculation that the government may roll out a consumption stimulus package boosting auto and household appliance consumption [but] we do not believe this is likely given the state of the economy and financial market”, Goldman went on to write.
A gauge of onshore consumer discretionary names was crushed on Monday, falling the second-most in six months.
Property developers were sharply lower. Beijing Capital Development dove nearly 10%.
You’re reminded that the onshore equity market is subject to abrupt turns in sentiment and investors have been particularly sensitive to any perceived hints from Beijing about authorities’ desire to cool things down.
Last month, for instance, shares plunged following a government-approved sell call on red-hot People’s Insurance Company. Citic’s bearish reco was accompanied by Huatai cutting CSC Financial to sell. The message was clear: Beijing wanted the market to take a breather.
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10-year yields, meanwhile, hit a six-month high to start the week as China’s bond selloff continues apace.
The bottom line is this, from Goldman:
Overall, the tone of the meeting statement was mildly less dovish than before, which is consistent with our policy expectations following the recent release of March data. The leadership might have intentionally sent a warning shot to the market, which has become visibly more optimistic about the outlook of the economy in recent months. As much as they fear a weak economy and market, they are also concerned about potential bubbles, especially in the equity market. Given the performance of the market in recent months, the risks are tilted towards the upside. The current leadership is particularly sensitive to these risks because of the experience of a boom and bust in 2015, which is not that far back.
The problem, as ever, is figuring out how to tap the brakes without prompting a rush to the exits by China’s notoriously skittish retail investors.
Herding cats, and such.
I was also interested in the Bloomberg article about more Chinese companies doing rights offerings as the market rose. Unless the government discourages that practice, the stimulus will just produce more common shares instead of higher equity prices.