Anything perceived as reducing the odds of incremental monetary accommodation is bad.
That simple lesson was relearned Wednesday, when Chinese shares dropped nearly 2% at one juncture before paring losses on reports that Beijing may ease rules on local-currency debt issuance for developers amid the worsening property crunch.
Had the CSI 300 closed on the lows, it would have been the worst day in nearly three months (figure below).
To say mainland shares have underperformed this year would be an understatement. The CSI 300 is down some 8% while the SHCOMP is barely higher. That, compared to the S&P’s monumental gain and a similarly impressive performance in European shares.
The proximate cause of Wednesday’s angst was, of course, verification that factory gate prices surged the most in more than a quarter century last month.
Chinese producer prices jumped 13.5% in October, the swiftest pace in 26 years (figure below).
CPI was the highest since September of 2020, although at 1.5%, it still looks subdued compared to the situation in developed markets. Core CPI rose 1.3%.
The surge in producer prices is attributable to a now familiar list of problems plaguing China’s faltering recovery, including surging commodity prices and an acute power crunch.
Pass-through to consumer prices has been limited, in part by lackluster domestic demand reflected in, for example, relatively tepid retail sales growth. The gap with producer prices is at multi-decade wides (figure below).
What you see in the chart “highlights weak consumer demand in the economy and the immense pressure on profit margins downstream firms are facing,” SocGen’s Michelle Lam said.
From a global perspective, the concern is obviously that surging factory prices in China will exacerbate price pressures in developed markets, where inflation is running at levels wholly inconsistent with policymaker mandates.
For markets, the immediate concern is that the hot price data reduces the already waning odds of another RRR cut from the PBoC, which has relied on liquidity management (i.e., OMOs) to ensure interbank stability and generally allay concerns tied to Evergrande and related tumult in the property sector.
Consumer prices would have risen more in October were it not for falling pork prices. Vegetable prices jumped nearly 16% YoY. Earlier this month, authorities accidentally sparked a mini-panic by encouraging families to stockpile food, as prices rose for vegetables amid extreme weather. The notice, from the Ministry of Commerce, also raised questions about simmering tensions with Taiwan.
Read more: What, Exactly, Is Going On In China?
Prices for fish, vegetable oil and eggs rose markedly last month as well, Beijing said Wednesday. As Bloomberg noted, “several food companies have already announced price hikes of up to 15%, including Haixin Foods, Anjoy Foods and Jiajia Food, due to rising costs for raw materials.”
Credit data for October (also out Wednesday) showed new yuan loans were 826.2 billion, better than the 800 billion consensus expected (figure below). That may suggest credit growth has stabilized, even as “deleveraging pressures remain,” as SocGen’s Lam and colleague Wei Yao wrote.
Aggregate financing was 1.59 trillion. That was lower than consensus. M2 growth was considerably faster than expected at 8.7%.
All of this is playing out against a backdrop defined by the property curbs and ongoing evidence of spillover from Evergrande, which needed to make $148 million of coupon payments on three dollar bonds Wednesday. This week brought evidence that the sector’s woes are even affecting government-linked entities. Prices for debt issued by Sino Ocean Group Holding, which is partially controlled by the finance ministry, slumped on Monday.
Markets were thus relieved Wednesday when the Securities Times, in a front-page story, said the government could ease controls on issuance by domestic real estate firms, which will get “blood transfusions” via bond investments by banks and other institutional lenders. The translated version is below:
The Securities Times reporter was informed that on November 9th, the China Interbank Market Dealers Association held a symposium with representatives of real estate companies. Some participating real estate companies have plans to register and issue debt financing instruments in the interbank market in the near future. Some bond practitioners told the Securities Times reporter that the convening of the symposium means that the relevant policies for real estate companies’ domestic bond issuance will be loosened. In the near future, there will be real estate companies issuing bonds and financing in the open market. At the same time, banks and other institutional investors It will also offer “blood transfusions” for real estate companies through bond investment and other means to prevent further deterioration of real estate companies’ capital.
Make of that what you will, but the market decided it was a positive development. Developers sold the least debt in the interbank market since 2019 last quarter. One analyst told Bloomberg the Securities Times story “has great implications because so far the marginal credit easing has only been seen on bank loans.”
Meanwhile, Cailian said some SOEs implored Beijing to adjust the infamous “three red lines” to allow for M&A in the property sector. That boosted sentiment as well.
Later, Tencent reported sales that missed estimates, as advertising revenue came up short. On a quick read, the results underscored the extent to which Xi’s crackdown is likely to weigh on results for Chinese tech, even if the worst is over.
Just another day in Beijing’s impossibly precarious juggling act.
