On Monday, Mainland stocks in China fell some 2.3%, in one of the worst sessions of an otherwise blockbuster year.
The problem: The economy is doing well again.
That’s an oversimplification, but the point in being so blunt is to draw your attention to the possibility that the “good news is bad news” dynamic that’s functioned in one form or another in developed markets over the decade since the crisis, is now seemingly operating in China.
Mainland shares are up some 33% in 2019, and it’s only April. Q1’s eye-popping surge marked the best quarterly performance since the halcyon days of early 2015 when the country’s latest equity bubble was in the final stages of an epic melt-up.
The Shanghai Composite, which had underperformed the S&P for a record 12 consecutive months through Q3 2018, has bested the US benchmark in four of the last five months, with February marking the widest performance gap in favor of Chinese stocks since April of 2015.
Now, with 2018 mostly a memory for Mainland equities, Beijing is keen to prevent another speculative bubble, and that means that as the economy shows signs of stabilizing (e.g., March’s activity data and the Q1 GDP beat), investors are looking for signs that authorities will use any improvement in the data as an excuse to dial back stimulus, especially monetary easing.
On Monday, a statement from a Friday Politburo meeting suggested support for the economy may wane going forward and, ultimately, that undercut Chinese stocks to start the week.
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On Tuesday, Mainland shares declined again, although losses weren’t steep.
Hours after markets closed in China, Reuters reported that the PBoC is set to take a pause on further RRR cuts. The rationale: The economy is improving.
“China’s central bank is likely to pause to assess economic conditions before making any further moves to ease lenders’ reserve requirements, after better-than-expected growth data reduced the urgency for action”, Reuters writes, citing “policy insiders”.
Analysts are predicting more RRR cuts in 2019 and at least one desk (Barclays) saw a chance of a benchmark cut, although that call was dropped last week following the Q1 GDP beat and blowout March activity data.
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While more RRR cuts are still likely, Reuters, citing government advisers, notes that even as “the central bank’s easing bias remains unchanged, it sees less room this year for cutting RRRs as fiscal stimulus plays a bigger role in spurring growth.” Here’s what one person close to the internal policy talks said:
In the short term, it’s not necessary to use RRR cuts to boost economic growth. Monetary policy should leave some room – if economic uncertainties rise or economic conditions deteriorate, the central bank could ease policy.
Beijing is looking to conserve monetary ammo and the recent stabilization in the economy combined with the equity market surge provides the perfect opportunity.
Notably, Reuters cites the same policy insiders as indicating that the chance of a benchmark cut is now even smaller than it was before.
All of this is presumably good news from the perspective of Beijing maintaining a healthy concern for financial stability and being careful not to risk a repeat of 2015, but it’s a bitter pill for anyone who hoped to ride more monetary stimulus to further easy gains in already extended A-shares.
The PBoC drained liquidity on Tuesday (no reverse repos against 40 billion yuan in maturing contracts). “The PBoC in no rush to inject liquidity into the market”, Stephen Chiu, FX and rates strategist at China Construction Bank Asia Corp. remarked.
Still, one imagines that Beijing will still step in to support domestic equities in the event things go off the rails. After all, the MSCI decision (here) and the addition of government and policy bank bonds to the Bloomberg Barclays Global Agg, likely means authorities will want to avoid any kind of drama that undermines confidence in the market, although the irony is that an interventionist approach actually serves to undercut the perception that Beijing is allowing the free market to work.
Whatever the case, if China has decided to halt RRR cuts and continues to cast a wary eye at the domestic equity rally, anyone buying A-shares here should at the very least be aware that Beijing may be angling to cool things down.
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The Chinese Communist Party would love to have you believe their economy is improving. Curiously though, Chinese energy consumption growth just keeps on dropping and we keep seeing falling exports in their supply chain countries like S Korea, Japan, Taiwan, Germany etc whose statistics are not make believe numbers to please Party bosses. Even massaged official Chinese stats had to admit that Q1 2019 GDP was up only 1.4%, a fall from 1.5% in Q4 2018. Within 6-12 months nobody is going to be believing these CCP bulls#!t figures anymore and we’ll see the current Chinese stock surge for what it is: a short term rally within a significant bear market. More than likely China is going to experience a major financial crisis in 2020 and we’ve been seeing the run up to that since early 2018.
“Within 6-12 months nobody is going to be believing these CCP bulls#!t”… do you know how long people have been saying that? 🙂
every year for as long as I can remember people have said “it’s all going to fall apart and these numbers are fake and the yuan will eventually suffer a sharp devaluation and the debt overhang will result in a financial crisis”.
all of those points are good ones, but what skeptics and naysayers aren’t willing to come to terms with is the fact that China can do whatever it wants when it comes to artificially inflating data, manipulating the currency, propping up the economy, boosting consumption, slamming the brakes on, mashing the accelerator, etc. and there isn’t anything anybody can do about it.
it may all be a house of cards, but that house of cards never seems to collapse, which is extremely frustrating for people who insist that it has to. bottom line: there is actually nothing that says it has to collapse. the idea that people like Kyle Bass, etc. are going to somehow outlast the PBoC and force the Politburo into submission in a financial staring contest is the most laughable proposition on earth