For the second time this week, Chinese equities suffered a steep selloff. Thursday was the second-worst day of 2019 for the Shanghai Composite, which fell 2.4%.
The problem on Thursday was, generally speaking, the same as it was on Monday: Investors are concerned about the prospect that with the domestic economy improving, Beijing will put the brakes on the stimulus push.
This is something we’ve talked about at length over the past two months. The bottom line is that, with 2015’s equity bubble still fresh in the minds of Chinese policymakers, Beijing will be careful to avoid a repeat now that the economy looks set to inflect for the better. That raises the specter of reduced stimulus and less liquidity. Good news on the economy is bad news for Chinese stocks to the extent it means less easing from the PBoC.
Although the central bank provided $39.8 billion in TMLF this week, that was seen as yet another sign that authorities will seek to delay further RRR cuts and other more indiscriminate easing measures in favor of a targeted approach.
On Thursday, losses mounted following comments from Deputy PBoC Governor Liu Guoqiang, who suggested Beijing has no intention of tightening or relaxing monetary policy. While this is just the usual party line about “prudence”, it comes at a delicate juncture. Here’s Reuters with the details:
China’s central bank has no intent to tighten or relax monetary policy, a vice governor said on Thursday, as the market debates how much more support Beijing will give the economy after surprisingly resilient data was released last week.
The People’s Bank of China’s use of reverse repos or a medium-term lending facility (MLF) does not signal that it has a loosening bias, Vice-Governor Liu Guoqiang told reporters at a briefing.
On the contrary, said Liu, if the central bank has not conducted reverse repos for a few days, it does not mean monetary policy is about to tighten. Those tools are designed to adjust short-term liquidity, he added.
This comes just 72 hours after officials told Reuters that the PBoC intends to “pause” RRR cuts.
Essentially, China is shifting to a more a neutral monetary policy stance and that’s spooking the equity market which, after Thursday’s losses, is on track for its worst week of an otherwise banner year.
Even upbeat earnings from Kweichow Moutai didn’t help – the shares fell nearly 2% on the day and consumer discretionary names were again a big drag, falling more than 3% for the second time this week.
This is, simply put, the realization of a hypothetical that some folks have been positing since February.
Beijing got the tentative signs of economic stabilization they wanted and it appears that a trade deal with the US is all but done. Now, they’re in bubble-control mode and that’s potentially bad news for anyone caught up in the bubble or hoping to get in on the next assumed leg higher.