Guo’s Bubbles

Tuesday’s word was “bubble” or, actually, “bubbles,” plural.

Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission and Party secretary of the central bank, expressed more than a little concern about what he deemed speculative excess in US and European markets, where he judged that asset prices are diverging from the underlying economic fundamentals.

China, Guo said, is worried about the fallout in the event those purported bubbles were to burst, which they will “sooner or later,” in Beijing’s judgment.

China should know. After all, they’ve fostered and presided over their share of bubbles. Cleanup duty usually involves arrests and draconian intervention. In the summer of 2015, for example, authorities halted some 75% of trading and started detaining folks on a variety of charges ranging from the plausible to the wholly ridiculous. That, after a leverage-fueled mania ended in tears. Note the blue dashed line in the figure (below). The red dot marks the peak of the 2015 equity bubble in mainland shares.

Ironically (or maybe intentionally) Guo’s Tuesday remarks had the effect of sinking local shares. Hong Kong equities have benefited from steady mainland inflows this year. Guo’s comments could make investors more cautious.

The Hang Seng dropped more than 1% Tuesday. Guo also called the Chinese property market a bubble and chided locals for conceptualizing of homes as investments and speculative vehicles. That mentality, he warned, is “very dangerous.” (Homes are for living in, or didn’t you hear?)

Note I included Kweichow Moutai in the figure (above). It’s bleeding out severely.

This might all sound trivial, but it’s not. Or at least not if you take it as an indication of where Chinese monetary policy might be headed going forward.

Guo spoke of “reduc[ing] the high leverage within the financial system.” He was speaking specifically (and I’ll quote him again here) “from [the] banking and insurance industry’s perspective,” but the message is pretty clear. China is leaning in the direction of tighter policy going forward.

The global economic cycle has, over the years, become increasingly tethered to the Chinese credit cycle. So, these kinds of remarks can send important signals about Beijing’s mindset. It’s also worth reiterating that Chinese officials don’t traffic in idle, ad hoc musings. Remarks are scripted and usually aim to send a message or serve some manner of purpose.

That’s not to say the message isn’t sometimes lost in translation — figuratively and, in some cases, literally. But there wasn’t much ambiguity in Tuesday’s warning.