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.”


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7 thoughts on “The Writing On The Wall

  1. CCP also signaling rent control:

    The interesting thing is that many of CCP’s goals make sense in the abstract, and similar pronouncements would please not a few Americans. Personal data, discriminatory pricing, labor exploitation, monopolies, property speculation, private education, rents, video gaming, online disinformation, financial schemes, are also hot-button topics in the West. We may view them with dismay due to their effect on stock prices, with doubt about their implementation, with suspicion of their role in political control. After all, our – or at least my – main interest is the market impact. But I wonder if Xi’s actions might not be quite popular with the average Chinese. Imagine that: Xi The Populist, Man of The People.

  2. So much for the the hybrid, state supported capitalism of the past couple of decades. Xi clearly wants to be the second coming of Mao. I wouldn’t be surprised if much of this is a response to the attacks ramped up by the Trump admin. China seems to be looking inward to get its house in order to be less dependent on the rest of the world for a time, at least. I suspect if these new restraints really harm business development and economic growth there will be some relaxation after a time. I do believe that Xi’s restraints on the Internet, kids playing games, etc. could well backfire. I still think the biggest driver of the Soviet breakup was the desire of the population to have the “stuff” the West had — a second real cultural revolution, as it were. I had numerous Chinese MBA students over the years. They were smarter than my native students, and more driven. I remember one female student who had earned a Masters in English lit at St.Petersburg University, who came to our MBA program with no business background. In two years she had a job at a major investment banking house in Toronto, made partner in three years and headed up operations for the bank in Europe. These folks know what’s going on and it will be hard to hold the best and brightest down.

  3. Boy, why put it that way? I mean, how different is what you are describing as the Chinese position from Roosevelt’s New Deal? The thing is, I have a hard time finding fault with what you describe above. Curb the power of billionaires? I think such an effort should be pursued with absolutely whatever it takes. Not that I want to replace democracy (such as we have it) with authoritarianism, it’s just that the thing the Chinese reforms are trying to combat (i.e., ‘Free’ Market Economics, Uber Alles), such proposed regulations would make the US a far better place for many more citizens in my opinion. Wealth equals power, there is no way to credibly refute this fact. Money equals power. And when a small number of humans hold that power, then the world marches to the beat of those small number of humans. And in this age of pandemic and global warming, the powers that be are failing us. Catastrophically. The world is staring to come apart at the seams and the billionaires only get richer. In this nihilistic environment they only make the case that they should end.

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