China stimulus rumblings were louder on Tuesday.
The PBoC telegraphed an MLF cut later this week with a 10bps reduction in the rate for short-tenor repo and “new” reporting suggested top officials in Beijing are preparing a package of new measures to bolster the moribund economy.
Note the scare quotes around “new.” Like the long-running “infrastructure week” joke in the US, proposed Chinese stimulus packages are an economic meme of sorts. It’s the same story over and over again, year in and year out. Growth falters, markets get impatient and several months later, the media says Chinese authorities are “mulling” a “raft” of new policies which aren’t yet “finalized” and “may be subject to change.” Even the copy and verbiage is the same in each successive iteration of this story.
June 2023’s version says the new stimulus plan is being “drafted by multiple government agencies” and encompasses “at least a dozen measures designed to support areas such as real estate and domestic demand.” That’s according to Bloomberg. Chinese officials are closely eying the property market, and additional rate cuts are possible.
Tuesday’s cut to the seven-day reverse repo rate pretty clearly suggested the one-year MLF rate will be lowered later this week. That, in turn, means one or both LPR rates will likely be lowered next week. Key activity data is due Thursday.
For what it’s worth, the last cuts to the repo and loan rates were in August. The most recent RRR cut was in March.
I’ll be forgiven for suggesting this is far too little, far too late, and also for preemptively panning the new stimulus package (which may or may not see the light of day) as ineffectual.
As predictable as the reporting around planned Chinese stimulus is, the rollout and follow-through is even more so. Almost invariably, the market is underwhelmed. There’s typically a “sell the news” element, but in addition, announcements are always couched in language that’s aimed more at ideological aggrandizing than at communicating actual policy objectives.
Implementation details are always sparse (if they’re included at all), and bank strategists are left to ponder a series of carefully-scripted decrees, all of which amount to obsequious recitations of Party talking points accompanied by nebulous allusions to the promotion of “high quality development.” Phrases like “fully implement” and “earnestly strive” are ubiquitous, but it’s never clear what, exactly, the relevant agencies are “striving” for, other than to appease and flatter Xi Jinping and his “thought.”
Given that, I don’t see much utility in subjecting readers to a collection of boilerplate quotables from the traders, analysts and bank economists who weighed in on Tuesday. With (sincere) apologies to those folks, what they have to say is almost totally irrelevant here. For one thing, none of them were engaged in markets in a professional capacity the last time Xi was in power, from 1949 until 1976, so they have no context.
Jokes aside, this is pretty simple really. Either China will roll out massive fiscal stimulus that admits of no ambiguity paired with aggressive support from the PBoC (and honestly, between the still labyrinthine character of the monetary policy transmission channel, and the bank’s aversion to “flooding,” I’m not sure how much help they can realistically be, particularly when demand for credit is impaired) or they’ll release another list of half-measures that reads like a bullet point summary of a Party manifesto. If it’s the latter, markets will be disappointed and the economy will be condemned to a muddle-through scenario.
Investors came into 2023 with high hopes for the world’s second-largest economy following the end of “COVID zero” in December. Those hopes were all but dashed over the first five months of the year.
On Tuesday, EM equities hit a four-month high and the yuan a six-month low.
