The Writing On The Wall

The writing is on the wall in China. And the font is large.

Beijing’s regulatory crackdown is no flash in the pan and it’s not “limited” or “targeted” either. It’s an across-the-board effort to rein in the influence of capital, scrub society of perceived Western excess, reestablish discipline (broadly construed) and codify Xi’s “thought.” It is, apparently, a “profound revolution.”

The reality of this has yet to set in for Western investors and, frankly, I doubt it ever will. We live in a world where people don’t confront reality. Rather, they suspend disbelief indefinitely in order to avoid coming to terms with their own follies.

Read more: Xi’s ‘Profound Revolution’ Renders Market Calls Worthless

There was no let up in the headlines on Tuesday despite a rebound in some stocks, including the Hang Seng Tech Index, which is flailing around in a desperate search for direction after falling nearly 50% from it February peak.

China is poised to crack down on private equity, for example. “Private equity funds must return to their defined role and support innovation and startups,” CSRC Chairman Yi Huiman said, in a speech, which warned that Beijing would “resolutely eliminate fake funds.”

For the most part, the speech was laudatory, but the undertones were ominous. Below find the full passage which served as headline fodder for Western media:

However, some domestic institutions have deviated from their proper positioning in the course of development, issuing public offering products in disguise in the name of private equity, setting up fund pools at will, attracting deposits and lending in disguised forms in violation of regulations, and even arbitrarily financing and embezzling fund assets.To a certain extent, the development of the industry has seen the coexistence of true private equity and false private equity, the coexistence of excellent managers and “fake” managers, the coexistence of registration management and the disorderly growth of the market, and other chaos, which damages the reputation of the industry and affects financial security and society. We believe that private equity funds must return to the fundamental direction of private equity positioning and support entrepreneurial innovation and strictly regulate the operation of all links in the entire chain of equity investment management. We will adhere to categorized policies, support the advantages and limit the disadvantages, support genuine private placements, combat chaotic private placements, resolutely eliminate false private placements, and promote the formation of a good market order and industry ecology.

Again, it wasn’t a particularly scathing address overall, but in the current environment, it was just another nod to Xi’s broad-based crackdown.

Meanwhile, vice housing minister Ni Hong pledged to stabilize property prices and normalize market expectations. “Healthy development” is paramount, Ni emphasized, at a briefing. Ongoing efforts to punish violations in the sector will “intensify.”

Also Tuesday, 21st Century Business Herald said local asset management companies should ensure outstanding financing doesn’t exceed three times net assets. That was according to a draft rule on local AMC supervision. And the State Administration for Market Regulation said E-commerce platforms risk losing their licenses if they don’t adequately address instances of IP violations by vendors.

And on and on. It never stops. It’s just one warning after another after another. Some have serious ramifications, some are merely nods to the necessity of exercising prudence. Interpreting the endless deluge is complicated immeasurably by the fact that market participants and financial media outlets are now so terrified that every utterance from any official — every press release from any regulator — is interpreted through the lens of the crackdown.

Meanwhile, the writing is on the wall for the Chinese economy too: It’s slowing down. China’s official non-manufacturing PMI slipped below the 50 demarcation line in August (figure below).

At 47.5, the gauge missed estimates by a country mile. Consensus wanted 52. The manufacturing index held above 50 — barely.

The bad news is, the data suggests Beijing’s “zero tolerance” approach to containing COVID outbreaks can result in abrupt economic weakness. The services slowdown comes as markets fret over an unfolding slowdown telegraphed by Chinese officials. Some worry rolling lockdowns and draconian virus restrictions could exacerbate the situation.

The good news is, the faster the world’s second-largest economy decelerates, the more compelled policymakers will feel to step in with more easing. Last month’s RRR cut conveyed a sense of urgency and most analysts expect additional RRR cuts by the end of the year, although opinion is split on whether the PBoC will cut OMO rates, LPR and/or the “old” benchmark.

Read more: Odds Of China Policy Pivot Game-Changer Increase Rapidly

To be sure, China’s services sector could do without shocks from the Delta variant. For the duration of the rebound from the initial COVID lockdowns, onlookers fretted over the uneven, two-speed character of China’s recovery.

There are lingering questions about domestic demand, and although there’s been little in the way of pass-through from surging factory-gate inflation to consumer prices, the angst is palpable. You’re reminded that China’s activity data missed across the board for July (figure below).

“The service sector was shocked by the delta variant, extending the ongoing theme of uneven recovery,” one analyst told Bloomberg, whose coverage noted that “high-frequency data… show the recovery is leveling off.”

It’s worth asking the usual (cynical) question: If the official data shows the services sector contracting, what does the “real” data show?

Meanwhile, Reuters said Tuesday that the PBoC “advised” some major Chinese banks to ramp up lending. Recall that credit provision slowed markedly in July, even accounting for the seasonal (figure below).

Reuters cited a pair of sources in noting that Yi Gang “told a meeting with banks last week that it would boost liquidity to the real economy and enhance the stability of credit growth.”

One source said, “We’ve ramped up lending over the past few days [but] it’s still weak.”