If you’re a Chinese mutual fund, Xi Jinping would prefer you didn’t sell stocks right now. Or at least not on net.
Market sentiment is poor, there’s another property meltdown brewing and a linchpin of China’s shadow banking complex may be imploding. So, do Xi a favor: Don’t sell more A-shares than you buy.
That was the “window guidance” to some large investment firms on Wednesday, according to sources who inexplicably risked life and limb to tell Bloomberg about the instructions, which were “relayed to fund managers” by their superiors.
This is actually a fairly common tactic for the Party. When they want stocks to stop falling, they simply instruct market participants to stop selling. In the summer of 2015, when a leverage-fueled equity mania unwound in dramatic fashion, Beijing famously halted three-quarters of the market, made arrests and eventually established a real-life plunge protection team which went on to buy an estimated CNY1.8 trillion in shares over six months.
Beginning in mid-June and continuing throughout July, I variously lampooned the financial media and gullible investors for buying into the same old nebulous promises emanating from Xi’s bureaucrats. “This is pretty simple really,” I wrote, on June 13, adding that, “Either China will roll out massive fiscal stimulus that admits of no ambiguity… 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.”
Fast forward two months and what happened? Beijing released another list of half-measures that read like a bullet point summary of a Party manifesto (late last month), the incoming data suggested the economy continued to struggle and as of this week, the MSCI China gauge was on the brink of YTD lows after fully erasing the bounce seen in and around July’s Politburo meeting. H-shares are similarly beset.
I’d be doing myself a disservice not to quote from my pointed warning on July 25 when I said, of the rally denoted by the chart annotation, “Nobody ever learns.”
Just two weeks on, all of the gains associated with the Politburo readout (which the financial media played up as a possible turning point) are gone. And Xi’s busy issuing do-not-sell orders to domestic fund managers (or “do not sell more than you buy” instructions).
Meanwhile, the PBoC leaned into the fix to the tune of nearly 800 pips. The yuan is flirting with the weakest levels against the dollar in 16 years. What you see in the chart below is the PBoC trying to push back — with little to show for it so far. Predictably, policy banks were spotted selling dollars on Wednesday.
One problem (among too many to enumerate) is the extent to which the PBoC is working at cross purposes with itself. They cut rates this week by the most since 2020 in an effort to short circuit the burgeoning deflation risk evident in the latest CPI data and otherwise put a floor under the economy, but easier monetary policy serves to undercut the currency, especially with Fed funds sitting at a 22-year high.
Alongside the MLF cut, Beijing reduced the 7-day reverse repo rate, and on Wednesday injected nearly CNY300 billion through that facility. There too, China is easing into currency weakness — paradoxical insult to injury is the fact that the currency weakness is first and foremost a function of the very same economic malaise that monetary easing is aimed at addressing.
That’s why China needs fiscal stimulus. Real fiscal stimulus, not a list of vacuous pledges. Nobody wants to hear any more about Xi’s “Thoughts” (proper noun). As anyone who’s ever lost a loved one to gun violence in the US will attest, “thoughts” don’t help, even when paired with “prayers.”
The longer the Party waits, the narrower their option set. If Beijing lets Country Garden go and doesn’t backstop Zhongzhi (or at least provide temporary guarantees for investment products sold by the likes of Zhongrong and other trusts), Xi could look up six months from now and find that helicopter money is the only way out.
You’ve had your finger on the pulse, while most of the pundits have listened to the delirious musings of the patient
Or the other tried and true solution to a reeling economy and restive population – a military action.
There are good arguments made that WWII rather than the New Deal is what finally pulled us out of the Great Depression.
I’ve never thought anything else and my dad was there, on Guam. He was on the first Navy team taking pictures in Hiroshima after the bomb. After the war the US took off without the expected inflation.
Don’t give them any ideas, Derek.
Dave – they don’t need my help. Flawed as it is, search for the Kyle Bass interview at the Hudson Institute. Just listen to the first 20 minutes or so where he lays out his argument that preparations for this option are already well underway.
His track record is far from perfect when it comes to China (he has long been a perma-bear), but it is worth a listen.
Thx, Derek. I appreciate the referral. Unfortunately, he seemed to me to be an alarmist in the interview. I had difficulty in getting past Bass’ presumptuousness, political slant, and posturing. I would probably have a hard time trusting anything this guy would say. Interviewer was nothing but a shill.
I believe the Chinese would lose their entire navy and a good chunk of their air force if they challenged the U.S., even as we’re just rebuilding a stronger presence in western pacific.
The U.S. posture in the world has changed with the Russia and Ukraine war. Russia caught everyone with their pants down. In response, and to support Ukraine, NATO countries are expanding production of weapons and defense capacity. That includes the U.S. as well. And as China ramps up their capacity, the US will respond in kind.
Your degree of confidence is not widely held by the US military. But it is shared by Kyle Bass.
The military’s job when facing threats from China or anyone else is to exercise caution. No one is saying China cannot hurt the US military or mainland. I believe China has the capacity to do both. But I sincerely believe China would experience unspeakable suffering if they messed with the US, especially if they came anywhere near the Philippines, Japan, South Korea, US military and naval installations, Hawaii, US territories, or the US mainland. And let’s not forget New Zealand and Australia. In my humble opinion, China’s great army-navy would not stand beyond a month or two. With the exception of small near-shore ships, I believe the greater bulk of the Chinese navy would be completely destroyed.
The Chinese communist mindset is to say all kinds of things and play games to seek political advantage. I call BS. When the rubber hits the road, the US military does not abide.
Derek –
Just to be clear, I agree with you that war with China is a risk. Walt agrees too. Read his HR Weekly+ note (see the links across the top of the page), published on Friday.
My first reaction to the current state of affairs in China is that Xi is floundering. His first impulse seems to be fixing the country’s difficulties by the use of force. The guy is twisted. He seems to lacks imagination. And it seems he’s potentially very destructive.
Note his management style in what he did to Hu Jintao back in 2012. He did not put Hu out of his misery. He retired Hu, suddenly and awkwardly, in front of the whole world. This action bears no comparison to making war. It’s just my guess that a guy like this can trigger a war.
Right now Xi has the appearance of someone who is managing more variables than his personal capacity permits. Frankly, he doesn’t seem to fully understand what he’s doing when it comes to the economy. He cannot force his people to spend their money and get the wheels turning in China’s economy. But, to Walt’s point in the article noted above, he might want to start a war.
Or…instead of committing trillions to further destroy humanity and the planet we instead put the investment into saving it…and economic benefits would be similar…oh to dream…
Sure…I’ve also come to see the “great New deal vs WWII debate” in a both / and versus either / or context as they both involved huge infrastructure investments… im not sure it worked out so great for the UK though…
Interesting to see the yields on longer duration US Treasuries rising…10 yr USTreasury around 4.25%. Are Russia and China selling some of their US Treasuries to prop up their flailing currencies ??
Never mind China/Russia – the US Treasury is selling a heck of a lot of Treasury notes/bonds. About $270BN in August, rising monthly to $350BN/mo by next year.