When it comes to tail risks, there’s inflation, there’s China and then there’s everything else.
That was the view from 430 participants in the October vintage of BofA’s Global Fund Manager survey, which I’ve referenced quite a few times over the past 24 hours. This month’s edition was, to my mind anyway, simply more interesting than most installments of the widely-followed poll.
Normally, I’d chuckle at the absence of specifics. There’s no nuance. Typically, we need nuance. Not with inflation — we know why that’s a risk. Same with asset bubbles. And the Fed taper. And COVID. But “China” is just a country (figure below).
In this case, though, simply saying “China” works because there are too many China-related crises unfolding to conveniently list. Even if you did list them all, it would be decidedly difficult (if not totally impossible) to choose which is the most vexing.
Several months back, additional easing from the PBoC by the end of 2021 was seen as a foregone conclusion. It was just a matter of which levers they’d pull. Now, though, market participants increasingly doubt broad-based easing is forthcoming. Even another RRR cut (i.e., in addition to July’s move) is seen as unlikely.
The central bank turned on the OMO spigot ahead of the holiday and delivered a sizable injection on Wednesday, but that’s not easing. That’s just liquidity management. Don’t let the headlines fool you.
“We believe the real factor behind the slowing economy is not a shortage of interbank liquidity, but bottlenecks due to property curbs, the energy crunch and COVID-19,” Nomura’s Ting Lu said this week. “With rising inflation, we think the chance of a rate cut is getting much smaller.”
LPR was unchanged for an 18th month (figure below) Wednesday. (The fix comes on the 20th of each month.)
It’s not likely that liquidity management alone is going to solve China’s problems. Growth data out this week disappointed, and activity figures for September were underwhelming.
As I put it Monday, policies aimed at curbing excesses in the property sector, reining in tech monopolies, streamlining regulations, putting the brakes on spiraling inequality and pursuing environmental goals at the expense of near-term growth, may be necessary and conducive to long run stability. But one can’t help but wonder if there’s a threshold beyond which the combined drag becomes unmanageable.
It isn’t possible to map, let alone plan for, every contingency in a situation where the presence of multiple overlapping crises means the number of hypothetical macro permutations is virtually limitless.
I realize this is repetitive (for regular readers), but note that just as market participants are increasingly at pains to determine which of China’s various crises poses the largest risk, so too are officials in Beijing debating where to direct their efforts. Early this week, Beijing was busy studying how to arrest surging coal prices. Tomorrow it might be back to debating the best way to cushion the blow from the property crackdown. And so on.
In their latest, SocGen’s Wei Yao and Michelle Lam called for “overt easing,” but suggested the Party might be misjudging the situation. “There has been policy easing, albeit in dribs and drabs [but] policymakers still seem reluctant to make any overt easing moves, possibly because they are attributing most of the blame to the power crunch, which has now eased but is not resolved,” they wrote, on the way to warning that,
Housing is the key and there seems nothing substantial in the near term to mitigate the downtrend. Hence, we stick to our view that policymakers need to undertake overt monetary and fiscal easing soon. We still believe the PBoC will cut the RRR and even policy rates this quarter.
As usual, the PBoC is sticking with a maddeningly repetitive set of talking points. On Wednesday, during a speech at a forum in Beijing, Yi Gang said the economy has developed steadily in 2021.
The goals set forth in the Party’s work report are achievable, he added.
H-Man, I love the long sentences when you express a thought. I am nominating you for the William Faulkner award.
The CCP controls the banks, provincial govts, and private companies to varying but substantial degrees, so it has granular, targeted and subtle ways to “ease”.
In recent weeks, the government has
– Directed banks to step up lending to property developers
– Directed provincial govts to ensure that housing projects get completed
– Directed property developers to pay their debts
– Directed wealthy founders to stand behind their companies’ obligations
“Direction” takes different forms, sometimes it’s merely “encouragement” or “exhortation”, and many directives won’t be reported in the media reports we read. It is hard to believe that CCP officials aren’t picking up the phone and making strong suggestions to various persons and entities, that will never ever be publicly disclosed.
This looks like an effort to support the property industry and asset class without explicitly bailing out the basket cases (Evergrande, etc) or their creditors broadly writ (though the ones that matter will probably get land or other assets from the carcass), and without resort to economy-wide stimulus/easing through LPR etc.
Similarly with the power crisis, the CCP didn’t use broad macro-financial levers; it ordered power companies to secure coal at any cost, released Australian coal from warehouses, and raised price caps.
As China reverts to more of a command economy, which is a plausible read of what is happening, it should have increasing alternatives to the “conventional” central banking tools like broad lending rates, yuan fix, reserve requirements, etc. Not that it won’t use those too, but if a problem is perceived to be specific to an particular industry, maybe industry-specific levers will be pulled instead.
jyl – great points there.