Chinese Stocks Now Deaf To Party Promises

It wasn’t so long ago — two months, actually — that policymakers in Beijing retained the capacity to engineer monumental equity gains simply by promising to stop engineering monumental equity losses.

On March 17, Hong Kong shares completed one their largest two-day rallies in recent memory following news of a Financial Stability and Development Committee meeting chaired by Vice Premier Liu He, who, among other things, “urged enhanced communication and coordination” between regulators on the Mainland and Hong Kong in order to “maintain stability” in financial markets.

Since then, Chinese policymakers have tried (and tried and tried) to repeat that feat, to no avail. Liu makes headlines more often these days than at any other time since he was a fixture of the news cycle during Donald Trump’s trade war. Soundbites from Premier Li Keqiang are likewise ubiquitous.

But China’s insistence on “COVID zero” is a perpetual drag on market sentiment. It’s the lockdowns, yes, but it’s also the threat of lockdowns. Markets hate uncertainty, as the old adage goes, and as far as anyone knows, any COVID outbreak, no matter how small, will prompt strict containment protocols, to the detriment of the economy.

Every day someone else downgrades their forecast for Chinese economic growth. That’s just barely an exaggeration. Turn on Bloomberg Television between 7 PM New York time and 10 PM and there’s a good chance you’ll hear about another bank cutting forecasts.

It thus came as no surprise that Chinese stocks tumbled Tuesday (figure above) despite the release of a 33-point action plan that included more than $20 billion in tax rebates and twice that much for railway construction bonds. “Power generation, freight volume and bank loans have all declined since April,” Li said, in remarks carried by Xinhua. “Without a certain level of GDP growth, stable employment cannot be realized,” he added.

Earlier this month, during a nationwide teleconference, Li delivered a dark assessment of the country’s employment outlook, which he described as “complicated and grave.” April’s dour activity data showed the surveyed jobless rate rose to 6.1% last month, higher than expected.

Multiple failed attempts to talk stocks higher in April suggested the Party was bumping up against the law of diminishing returns. Now, it looks as though officials have reached the point of no returns. Or even negative returns. As one strategist put it Tuesday, Beijing can’t control a “loss of public confidence.” It didn’t help that Carrie Lam indicated border controls wouldn’t be relaxed during the remainder of her term as Chief Executive, which ends next month.

Last week, the PBoC prodded banks to reduce the longer-tenor loan prime rate in a bid to reinvigorate the housing market, but with the Fed tightening aggressively, some see limited scope for policy rate cuts. Recall that the LPR reduction came despite no preparatory cut to the medium-term lending rate. I talked at some length about that last week. “The fact that the PBoC green-lighted a cut in the LPR but not the MLF rate underscores its deep concerns on yuan depreciation and capital outflows,” BofA’s Helen Qiao and Miao Ouyang said, suggesting the central bank is worried that the inverted yield spread with the US could exacerbate capital flight.

“China appears to have now stopped publishing the data, but April saw a third straight month of foreign investor bond outflows to the tune of $16.4 billion following outflows of $17.7 billion and $12.7 billion in March and February, respectively,” TD’s Mitul Kotecha remarked. “In total, China has seen a record net $36.5 billion in bond outflows YTD compared to inflows of $56.1 billion over the same period last year, a stark reversal.” The figures (below) illustrate both the fixed income outflows and equity outflows (through the connect).

On Monday, Joe Biden alluded to the possibility of rolling back some Trump-era tariffs, but it’s not immediately obvious that would benefit either party in the very near-term. If it drives yuan strength, it’ll neutralize any disinflationary impact for US consumers, while simultaneously serving as an additional drag on Chinese exports, one of the last remaining pillars of economic support. That pillar cracked in April, by the way. China wants some yuan weakness, just not too much. The same is true of yuan strength. Everything is a tightrope walk.

“One good thing is that we refrained from excessive money supply and mass stimulus in the past few years, and we still have policy tools in reserve,” Li went on to say Monday, in remarks accompanying the rollout of the new stimulus plan. He continued:

For China, development is the basis and key for resolving all problems. We must efficiently coordinate COVID response with economic and social development and better use the experience we gained in the past two years. Policy support must be beefed up, and policy measures should be swiftly rolled out wherever needed to keep major economic indicators within the appropriate range and ensure stable overall economic performance.

Those comments were the latest manifestation of what’s become a confusing back-and-forth between Li and Xi, with the latter speaking mostly through stern, overwrought Party pronouncements carried by state media.

In short, Li seems palpably concerned about the economy, and particularly about employment. Xi, on the other hand, seems to view the COVID fight as a moral and, more importantly, a political imperative. To the extent there’s tension within the leadership over what to prioritize, everyone knows who’s going to prevail. And that, in part anyway, explains the market’s pervasive skepticism.