Back in April, several media reports suggested China was on the verge of rolling out a stimulus plan that included measures designed to boost auto sales amid a deep slump and bolster consumption more generally via subsidies for everything from smartphones to appliances.
The reports came hot on the heels of March activity data (which beat across the board) and a Q1 GDP print that showed the Chinese economy did not, in fact, decelerate in the first quarter as expected.
Fast forward six weeks or so and we now know, thanks to the latest activity data, that the Chinese economy had begun to decelerate again even before Trump’s latest trade escalations. Over the course of the last month, the dispute between Beijing and Washington has descended into recriminatory farce. Further escalations seem inevitable and, indeed, China appeared to take aim at Amazon on Thursday, just a day after fining a Ford joint venture and less than a week after launching an investigation into FedEx.
With the outlook for a resolution bleak, China officially unveiled the stimulus measures leaked in April and they look underwhelming. Local governments are forbidden from putting any limits on car purchases and are encouraged to roll out “support”, assuming they can. There is no new spending from the central government, which is ostensibly constrained by tax cuts and also by fears of contributing to bubbles or putting further pressure on the yuan at a delicate juncture.
The statement from the National Development and Reform Commission says the plan is “focused on auto, home appliances and consumer electronics” and aims to “cement the trend of upgrading in those industries.” Ultimately, the NDRC wants to “promote the formation of a strong domestic market.”
Whatever, right? It’s a watered down version of the draft leaked in April and the idea is to bolster domestic consumption. Period. Relative to the draft plans (see first linked post above), there was no mention of subsidies for home appliance purchases and no mention of increasing the number of auto licenses. Car sales have fallen for 11 months in a row in China (sales fell more than 15% in April).
Shares of BYD jumped nearly 6% on the news (top pane below). But Chinese equities more generally marked an unceremonious end to a holiday-shortened week. The ChiNext fell more than 2% on Thursday, logging its seventh consecutive losing session and pushing the tech-heavy gauge into a bear market.
The ChiNext was the first onshore gauge to surge into bull market territory in the new year. It now becomes the first to fall more than 20% from its peak.
Apparently, liquidity worries are proliferating ahead of the hotly-anticipated launch of the new tech board, but more broadly, the ChiNext is simply the first on the firing line when it comes to getting nailed during tumultuous times. It’s feast or famine and considering the gauge surged 35% in Q1, it was inevitable that gravity would reassert itself in the event trade tensions escalated anew.
Meanwhile, the PBoC offered 500 billion yuan in MLF on Thursday in an effort to offset the liquidity squeeze from 463 billion in maturities. The central bank also sold 10 billion yuan in seven-day reverse repos.