China Tried To Talk Stocks Higher. It Didn’t Work

The PBoC ran up against the law of diminishing returns Tuesday, when an attempt to talk domestic equities higher fell flat.

With stocks reeling and outflows accelerating, China’s monetary authority promised to do its part to support the faltering economy. In a statement, the bank reiterated plans to wind down Xi’s regulatory blitz on platform companies, while leaning on boilerplate rhetoric to emphasize the role of “prudent monetary policy” in bolstering hard-hit industries and small businesses amid new COVID lockdowns.

Mainland stocks, which logged their largest single-session decline since February of 2020 on Monday, initially bounced, before ultimately closing lower. Again.

The PBoC blamed what it called “market fluctuations” on poor sentiment, which felt like an exercise in question-begging. A pledge to keep liquidity “reasonably ample” could’ve walked out of any other PBoC statement issued over the past half-decade.

Judging by the intraday price action, verbal intervention from Chinese authorities has a half-life of just a few hours now. The CSI 300 is mired in what feels like a hopeless grind lower (figure below).

Tuesday’s failed rescue marked a stark contrast with the results of March’s multi-agency jawboning effort, which triggered an astounding — almost comical — rally in Hong Kong benchmarks.

If we gauge success by the reaction in city shares, the PBoC was a measure of successful Tuesday, but even there, the bounce proved fleeting.

The perpetually beleaguered Hang Seng Tech index, for example, initially jumped nearly 6% when the PBoC said it would “steadily push forward and complete the rectification of large platform companies as quickly as possible.” By the close, the gain was less than half that.

Note that the gauge surged a ridiculous 22% in mid-March, when officials last sought to bolster market sentiment (figure above).

At this point, it’s not obvious what Chinese authorities can do to turn the tide. Countenancing a gradual depreciation in the yuan is one way to put a floor under the economy, and a hodgepodge of commentators were keen on Tuesday to emphasize that the risk of capital flight is much lower now than it was in 2015/2016.

Nevertheless, it’ll be a balancing act. The PBoC despises a one-way bet, and the yuan had become just that, which is why Beijing stepped in to cut the FX reserve ratio.

The Party expanded COVID testing in Beijing Tuesday, exacerbating domestic growth worries and underscoring stagflation concerns globally.

“China’s growth has slowed further in the wake of widespread lockdowns,” TD’s Mitul Kotecha said, in a new note, adding that although “the worst may be over, April data is likely to be weak and the economy will continue to stutter.” The bank’s high frequency GDP proxy is now tracking below official data. Growth, TD remarked “is likely to miss the official target.” They cut their forecast, becoming the latest bank to adopt a more cautious view.

Although TD generally echoed the notion that destabilizing capital outflows are unlikely, Kotecha noted that the yuan may be at risk from the current account side, depending on how things evolve. “As it is, the trade picture is worsening and exports are likely to slow further in the months ahead,” Kotecha wrote, adding that although the persistence of “COVID zero” means outbound tourism will remain restricted for now, “when the government finally allows Chinese tourists to venture abroad this will act as a significant drag on the services account.”

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2 thoughts on “China Tried To Talk Stocks Higher. It Didn’t Work

  1. If Beijing enters Covid lockdown, and disruption from Shanghai lockdown spreads to other cities not (yet) locked down, “the worst may [not] be over”.

    Xi’s more sensible advisers must surely be telling him that, until China vaccinates its population with an effective vaccine (read: a Western vaccine, or the still-unseen successful Chinese mRNA vaccine), the cycle of lockdowns will not end. Covid is not mutating to be less virulent (severe). Rather, populations outside of China are acquiring increasing protection from severe Covid via vaccination and/or prior infection. In persons who are both unvaccinated and not previously infected, Omicron is not substantially less virulent than OG or Delta. The Chinese population, largely unprotected either via an effective vaccine or prior infection, remains highly vulnerable and will continue being so, unless Xi changes his course.

    For goodness sake, do a mini-trial on the Biontech Omicron-specific vaccine in China, claim that “Chinese scientists helped develop this new vaccine specifically for Chinese physiology” or whatever, rename it something Chinese sounding, and show off Chinese societal efficiency with a mass vaccination-boost campaign. Sure, it will cost $40BN, but that’s nothing compared to the benefit.

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