China’s taken to pre-announcements lately.
Last week, Premier Li Qiang revealed the headline annual growth figure for 2023 in Davos a day before the official GDP release. On Wednesday, Pan Gongsheng told a briefing that the PBoC will cut the reserve requirement for banks next month.
I don’t know what’s behind the sudden inclination to tip off markets on key data and policy decisions, but it’s not typical.
The RRR cut would be (or will be, I guess) the first since September, and this time it’s 50bps. It’ll be the first half-point reduction in more than two years.
Recall that the PBoC unexpectedly left the key one-year MLF rate unchanged this month, disappointing consensus, which expected a cut.
The context for the RRR decision is obviously the never-ending stock selloff which found H-shares flirting with their worst levels in nearly two decades earlier this week, while the Mainland benchmark trundled to five-year lows following a third consecutive annual loss.
Rumors are flying. On Tuesday, the mainstream financial media said Beijing may be cobbling together a two-trillion-yuan stock rescue package after a series of measures in 2023 failed to arrest the slide.
The RRR announcement on Wednesday drove a second day of gains for Hong Kong-listed Chinese shares, which notched their largest two-session increase since the ill-fated re-opening rally began 14 months ago.
Sentiment is egregiously poor and demand for credit (note the emphasis) is tepid commensurate with a lackluster domestic consumption impulse evidenced by the longest run of CPI deflation since 2009. The RRR cut works on the credit supply side, which doesn’t address the problem. For the umpteenth time: China needs fiscal stimulus. The government needs to spend if the private sector won’t.
Pan, who replaced Yi Gang as PBoC governor last summer during a reshuffle aimed at reconstituting the dual-role setup at the central bank wherein the same person’s Party secretary and governor, preannounced a handful of additional stimulus measures on Wednesday.
Later this week, the PBoC will cut relending rates in an apparent bid to get credit flowing to farmers and small businesses. Pan also sketched the contours of an effort to bolster commercial property developers.
Will any of this ultimately matter? I don’t know, honestly. I doubt it? (That’s a question.)
Beijing needs to address the source of the problem. The Party has accumulated a rather large credibility deficit both with overseas investors and domestic consumers. Addressing that isn’t (or shouldn’t be) especially difficult and importantly, it doesn’t cost anything.
The Party should make it clear that they earnestly understand the extent to which the perception of capriciousness is feeding a crisis of confidence among households, businesses and foreign capital. Fiscal stimulus would still be necessary, but it’d help tremendously if everyone (anyone, really) thought Xi was willing to accept some blame for a situation that’s plainly suboptimal.
Anyway, the RRR cut (from February 5) will free up a trillion yuan, or around $140 billion, in liquidity. At least Xi’s giving you an opportunity to exit Chinese equities at a better price. (That’s a cheap joke, but it felt somehow obligatory.)
Call this one of my typical flights of fancy but something occurred to me whist reading this. Xi is worried. The last estimate I saw of the size of China’s rising middle class is that it is probably larger than 400 million souls. The people want things and within reason, Xi wants them to buy things. And if they could fund their golden years (a valuable part of Chinese culture) with investments, it would be better for the country. So as my as Xi is trying to ruin what he considers to be greedy capitalists, he needs them to buy stuff, help fund GDP growth, and survive in their senior years. That 400 million consumers and business founders is a population bigger than the whole US. It is valuable and Xi cannot afford to create too much damage to these folks. He kind of has to remain a closet capitalist. He is getting older, and like all of us, he knows that. He wants to be remembered in the same breath with Mao but he can’t leave the country in a shambles like his idol did. He has to place his society/economy on a razor’s edge and offer nightly prayers to whomever. I suggest another read through of the “Analects.” Balance, Xi, always balance.
Pushing on a noodle.
The bottom-fisher in me is tempted. But I exited BABA TCEHY etc almost four years ago, and the work required to relearn the stocks might be better spent on, say, semis or transports or any number of US industries.