Yesterday, when describing the latest round of monetary stimulus out of Beijing, we said that "China is not done stimulating" and boy were we right.
Global markets are sharply higher (again) on Thursday, fueled by hopes of more intervention just days after the central bank announced the biggest monetary stimulus since the pandemic, after China extended its stimulus barrage for the third day in a row, and vowed even more support including a pledge to intensify fiscal support for the world’s second-largest economy, as well as press speculation of 1 trillion renminbi of bank injections.
- *CHINA WEIGHS INJECTING $142 BILLION OF CAPITAL INTO TOP BANKS
China vowed to save the private economy, stabilize its property sector from further slumping, boost its stock markets and ensure necessary fiscal expenditures, according to the readout from a Politburo meeting on Thursday.
“It is necessary to help enterprises tide over difficulties,” said the readout, which was released just after 1pm.
The top decision-making meeting, which was chaired by President Xi Jinping, came after financial authorities rolled out a raft of stimulus measures on Tuesday.
“It is necessary to look at the current economic situation comprehensively, objectively and calmly,” the readout said. “Face up to difficulties, strengthen confidence, and effectively enhance the sense of responsibility and urgency to do a good job in economic work.”
The politburo pledged on Thursday to “issue and use” government bonds to better implement “the driving role of government investment”, in comments that come as analysts warn that China is in danger of missing its official economic growth target this year.
There was a sense of emergency intervention in today's politburo meeting because as Morgan Stanley analysts noted, the politburo usually does not hold economic sessions in September, suggesting “an increased sense of urgency” about growing deflationary pressures. But they said China’s government did not yet appear to have reached a “whatever it takes” moment on the economy... at least not just yet.
Still, there was a certain sense of open-endedness to the latest promises as state media reports of the meeting did not provide figures for the proposed fiscal stimulus, or whether it would exceed existing plans for long-term central government and local government issuance this year.
“We should increase the intensity of countercyclical adjustment of fiscal and monetary policies,” state news agency Xinhua cited officials as saying.
“It is good to do this fiscal easing,” said Winnie Wu, China equity strategist at Bank of America. “For the economy to expand and boost activity, create demand, the government will have to lever up. But we need to see the numbers . . . if this is not enough [I expect] there will be more follow-up in the coming months.”
What was notable, is that the meeting specifically mentioned “to stop property price falling further”. This is a dramatic contrast to the earlier mantra of “home is for living in, not for speculation”. There are other property specifics in the meeting minutes.
Some other notable take homes from the politburo meeting:
- The meeting recognized the challenges that the economy is facing, and vowed to achieve the 5% growth target. This is different from the earlier change of tone of “striving the best to achieve the 5% target”.
- The meeting explicit stated that there will be policy support for the capital market, and make funds easier to access the market. It shows that the capital market is important in the overall design of policies.
- There were detailed discussions about improving jobs and social welfare.
- Xi also warned against inertia among cadres in striving for economic growth. “The vast number of party members and cadres must have the courage to take responsibility and dare to innovate,” the readout said.
The politburo’s statement follows measures this week from the central bank and financial regulators including interest rate cuts and billions of dollars of funds to prop up the stock market and encourage share buybacks. The moves, which also comprised steps to support China’s crisis-hit property market, sent the country’s moribund stock market soaring as investors bet on increased state support for equities.
But the government has stopped short of announcing a fiscal “bazooka” as it has during past crises, such as when it unleashed Rmb4tn ($570bn) in 2008, sparking a boom that reverberated through the global economy. The government was already planning to issue about Rmb5tn in long-term government bonds and special-purpose local government bonds this year, but most of this was earmarked for investment in infrastructure or other projects.
Economists estimate that given the much larger size of China’s gross domestic product compared with 2008, it would need to spend up to Rmb10tn over two years to fully reflate the economy, with this money going to households rather than big-ticket infrastructure or industrial projects. They warn that China is in danger of slipping into a full-fledged deflationary spiral as the property slump weighs on domestic consumption even as investment in manufacturing rises.
“A proper reflation [of the Chinese economy] involves either of these two things: a much weaker currency or very aggressive fiscal stimulus,” said Homin Lee, senior macro strategist at Lombard Odier.
Commenting on the latest stimulus, Goldman Delta One head Rich Privorotsky writes that the Politburo (chaired by Xi) is "saying all the right things including pledging they will do the appropriate level of the sorely-needed fiscal spend", which according to the Goldman trader is an "all out effort to support markets and stabilize confidence ahead of national holiday. Fiscal was the missing piece and market will continue to chase allocations to the geography as confidence builds around its deployment." Goldman's own flows showed the single largest buying in its records …but market participants are still structurally underweight. Seems we’ve found the pain point for the CCP/PBOC/MOF...Xi and optimistically fiscal support will now come following monetary support for assets."
In response, local markets exploded higher, and China’s CSI 300 stock benchmark was up more than 4% on Thursday, fully erasing its losses for the year. The Hang Seng Mainland Properties index, which tracks Chinese developers listed in Hong Kong, rose more than 14%. In retrospect, just as we predicted last Friday...
... China had indeed reached its breaking point, and it is very much unlikely that the half measures we had seen for so many years are finally over.
China's euphoria quickly spilled over into global markets, and Europe opened higher, with the region-wide Stoxx 600 index climbing 1% Frankfurt’s Dax gained 1.1 per cent, while Paris’s Cac 40 rose 1.3 per cent. The markets’ respective automotive and luxury sectors are heavily exposed to China. Finally, US equity futures are also set for new all time highs, although the coming global reflationary wave sparked by China is hardly what the Fed, and markets, want to see as it extends its rate cuts over the next year.
