Investing in Chinese Stocks has declared game on for Chinese credit:
Turns out we may have only had hours to buy the dip in Chinese stocks as regulators went into panic mode over the weekend, China Not Trying to Chill Red-Hot Stock Market, Says Regulator.
In a statement published Saturday evening, the commission said measures rolled out on Friday, including tightening rules on margin lending and promoting the use of short selling, aren’t aimed at clamping down on a red-hot market:
The measures are about “maintaining the healthy development of the market,” the CSRC said in the statement. “They aren’t intended to encourage short selling, let alone depressing the market…the market shouldn’t over-interpret the measures.”We’re not trying to pop the bubble, but even if we we’re, there isn’t a bubble. Please continue buying.
The PBOC joining in the panic on Sunday, China makes big cut in bank reserve requirement to fight slowdown:
China’s central bank on Sunday cut the amount of cash that banks must hold as reserves, the second industry-wide cut in two months, adding more liquidity to the world’s second-biggest economy to help spur bank lending and combat slowing growth.
The People’s Bank of China (PBOC) lowered the reserve requirement ratio (RRR) for all banks by 100 basis points to 18.5 percent, effective from April 20, the central bank said in a statement on its website www.pbc.gov.cn.
“Though the growth in the first quarter met the official target of around 7 percent for 2015, the slowdown in several areas, including industrial output and retail sales, has caused concern,” said a report published by the official Xinhua news service covering the announcement.
The latest cut, the deepest single reduction since the depth of the global crisis in 2008, shows how the central bank is stepping up efforts to ward off a sharp slowdown in the economy.
“The size of the cut is more than expected,” said Shenwan Hongyuan Securities analyst Chen Kang.
“It’s going to release around a trillion yuan (in liquidity) at least.”
…Premier Li Keqiang publicly exhorted banks to lend more to the real economy during a visit to major banks on Friday.One of the main arguments here for the past couple of years was the tight money orientation of Xi, Li and Zhou. I don’t think that is the case anymore. While monetary policy may be tight because the central bank is behind the curve, the era of tight money is over.
The cut is positive for equities. Thus far CNH and CNY are stable, but let’s see if it holds.
Citi has an opposite read via FTAlphaville:
We reiterate H [shares of mainland Chinese companies traded on the Hong Kong stock exchange and denominated in Hong Kong dollars] preference over A [shares of Chinese companies listed on either the Shanghai or Shenzhen stock exchanges], following the 100-bp RRR cut and CSRC’s margin trading rule enhancement over the weekend. The “economic policy put option”, i.e., easing bias if economy weakens, is in line with our views post 1Q15 GDP. The RRR cut, more significant than expected, suggests urgency to ease and provides Rmb1.3tn liquidity. Our economists now expect two more rates cuts and two more RRR cuts ahead in 2015. MXCN gained 1% on average following 50-bp RRR cuts historically. For the gov’t A-share equity policy stance, however, we think an “equity policy call option”, i.e., tightening bias if equity surges, seems emerging given the high leverage and reasonable valuation (CSI300 excl. banks trading at 29X with 10% EPS growth). The margin trading rule encourages short sells, and aims to moderate the leverage build-up from margin trading, umbrella trusts and stock matches endowment, which in our view is helpful to contain households’ equity exposure risks and guide liquidity to serve the real economy urgently, combined with accelerating IPO/placements…
“Policy Put” has been the key logic of A-share rally, but now with mixed outlook — Recall the A-share hedge fund CEO on Citi April 1st Industry Day views A-share rally was triggered by the “Policy Put” since mid-2014, when the gov’t indicated a policy shift towards growth stabilization, and he views any reversal of equity policy stance could be a downside risk. Nowadays CSI300 doubled within one year, with global high-end margin trading exposure and reasonable valuation, we believe it is time for the gov’t to gradually neutralize the equity stance but with accelerating IPOs/placements ahead so as to nourish the real economy, although we believe the general economic policies will continue to ease until GDP stabilizes.
That looks well ahead of the curve to me. Stocks don’t look likely to stall as liquidity increases. On the contrary. But will it help the real economy? From Wei Yao at UBS:
On Sunday, the People’s Bank of China (PBoC) announced a cut to the required reserve ratio (RRR) for all the banks by 100bps and also offered extra RRR reduction for a selection of banks that support the agriculture sector and small and micro-sized enterprises. The last time that the PBoC cut the RRR this much in one-go was at the height of the global financial crisis. This is certainly an aggressive move, but not a surprise to us. We have argued that the PBoC was falling behind the curve and had to try harder amid sharp growth deceleration (see analysis). Our forecast was 100bps in two doses in April and May, but the alarming loss of speed as suggested by March data well justified one big move
In addition, the move may also be intended to pre-empt potential liquidity tensions arising from two developments.First, initial public offerings in the equity market have gone apace. Together with the strong stock market performance, liquidity is increasingly diverted away from the banking system and the bond market. Second, the deposit insurance scheme will be formally implemented starting 1 May. The first premium payment by banks is very likely to take place soon, which will add additional liquidity pressure in the interbank market.
We estimate that the total liquidity injection could exceed CNY1.3tn. This massive injection will surely exert meaningful downward pressure on interbank rates, which should provide banks much-needed incentive to price loan rates more attractively and invest more in local government and corporate bonds. We think that the PBoC will likely pace its open market operations at the same time to smooth the impact. In our view, the central bank’s policy intention is to guide short-dated interbank rates to the level seen in early 2014 (eg. overnight repo at 2~2.5%), but not so low as those seen in 2009/10.
Sounds right to me. And from UBS’s Wang Tao:
Although money market rates have stabilized down of late, the tightness of overall base money supply may have prompted this move. Notwithstanding the recent moderation of interbank rates (e.g., 7-day repo rate has cooled down late February’s peak of 4.9% to less 3% at present), China’s base money supply has come under significant pressure from the acceleration of net FX outflows. According to PBC official, FX assets on the PBC balance sheet contracted notably by RMB 252 billion in Q1, much larger than last Q4′s RMB 134 billion and in sharp contrast with the substantial RMB 788 billion increase during the same period one year ago. Although the PBC expanded the size of its net liquidity injections to RMB 490 billion in Q1 via the simultaneous use of reverse repos, SLF and MLF facilities, the combined contribution of such liquidity provision operations and FX flows to base money (RMB 238 billion) still fell short of the same period last year (RMB 414 billion) by a large margin. In other words, PBC’s liquidity provisions remain inadequate to fully offset China’s sizeable FX outflow leakage. As a result, base money growth slowed from 8%y/y last Q4 to a multi-year low of 4.5%y/y during January and February, and may have lost more steam in March and April, dragging down overall growth of broad money aggregates. For example, PBC cited FX outflows as a key factor behind the recent slowdown of M2 growth (from 12.2%y/y last Q4 to 11.6%y/y by Q1). This highlights the necessity of more forceful actions, including today’s RRR cut.
Today’s move reaffirms the PBC’s easing policy stance so as to maintain adequate interbank liquidity and stable base money growth.
That’s also right, I reckon. The plane has slipped below the glide slope and needs a little extra juice. Recall that Q1 GDP was an annualised rate of 5.2%. Chinese monetary policy remains caught between capital outflows – as the US tightens (relatively!) that also tightens China’s domestic liquidity – and the need to ease interest rates which only exacerbates the capital outflow.
It’s a feedback loop that ensures further Chinese easing but not enduring easiness. The upshot is we’ll likely see freer credit and growth for a couple of quarters.
