It’s “everybody back in the risk pool,” Nomura’s Charlie McElligott said Tuesday, on the heels of an overnight rally in Chinese tech which I described (aptly, I think) as “ridiculous.”
“Ridiculous” not necessarily because there aren’t bargains to be had if you’re willing to sift through the smoldering wreckage from Xi’s scorched earth regulatory campaign. Rather, “ridiculous” because it felt like your standard knee-jerk reaction amplified by fresh PBOC nods to credit support and money growth.
As usual, the message was accompanied by adjectives like “appropriate,” which serve a dual purpose: They give policymakers plausible deniability when it comes to claiming the de-leveraging push isn’t dead and they make it impossible to suggest policy isn’t prudent, because “appropriate” is a synonym for “prudent.” (They probably even used “prudent” if you read the original statement, before it was run through Google translate.)
“Prudent” or not, the message is clear. “Basically stable” — another PBOC favorite when it comes to describing the likely trajectory of monetary policy — now means some pickup in credit growth, and although consensus has yet to coalesce around a call for an outright policy rate cut, most analysts view additional RRR cuts (i.e., atop last month’s move) as a foregone conclusion.
And remember, it’s somewhat cumbersome (for lack of a better word) to speak about “the” policy rate in China. There are a bunch of them, colloquially speaking. Yes, there’s an official lending rate (yellow in the figure below), but it hasn’t been cut in years and it was effectively sidelined in August of 2019, when the PBOC unveiled the revamped loan prime rate (purple). Subsequently, China embarked on a quest to make it (LPR) the de facto policy rate. But LPR is priced off the MLF rate (red). And so on, and so forth. The blue shaded area in the figure (below) is the LPR discount to the “old” policy rate.
In any case, the point is that market participants increasingly see policy easing in China as likely, and it’ll presumably come in conjunction with proactive fiscal measures.
Officials have repeatedly said growth is poised to slow and although the regulatory blitz is aimed in part at ameliorating the concentration of wealth and curing other social ailments, the collateral damage could negatively impact growth through a number of channels.
Recall that July’s data was less than robust. Retail sales and industrial production missed, and credit growth slowed more than expected even accounting for the seasonal (figures below).
“The numbers are looking so bad that it’s forcing authorities to overcompensate with offsetting / easing / liquidity measures,” McElligott said Tuesday, citing colleague Ting Lu.
In the August edition of BofA’s closely-watched Global Fund Manager survey, more than three-quarters of respondents said they expect China to ease (figure below, from BofA).
That was “up drastically” from July, the bank’s Michael Hartnett wrote.
“The odds of an outright PBOC policy rate cut are ticking higher each day with real delta,” McElligott went on to say Tuesday, adding that Nomura’s Econ team sees a “growing ~30% probability by October and 50% probability of a cut” by the end of the year.
In my early days as a finance prof (1975) I received a four-month internship at Lennox Manufacturing (Atta’ boy, Dave) working for the CFO. In those days Lennox was a closely held family company that had never done an ad or posted a number. The deal was they were by far the industry leader in sales, etc. but no one knew, or really believed that. The lack of transparency kept them off everyone’s radar and allowed them to attack competitors in ways they never saw coming. Big private companies that operate mostly as “dark” entities have a competitive advantage from that privacy. I doubt we will ever know exactly what or how well China is actually doing except for little snippets of data that have to come out from public activities. That’s a source of power that won’t soon be relinquished. Most of China’s history has been behind the curtain and the West will never really know what they would like. I’ll make one prediction: they will be in Afghanistan soon (if not yesterday).
That… and the fact that cies in the eye of the storm (like Tencent) still somehow manage to print exceptional quarterly numbers… Unless someone wants to argue they’re fake, it’s a pretty compelling statement that they can still thrive under Xi wrathful gaze…