Is China already panicked to stimulus?

Here’s Premier Li Keqiang:

…it is necessary to coordinate the economic operation in the second half of this year and next year, and strive to keep it within a reasonable range. In view of the environmental changes at home and abroad and the needs of market players, we should maintain the continuity and stability of macro policies, insist on not engaging in “flood irrigation”, enhance forward-looking precision, strengthen interval control and give priority to employment. Our proactive fiscal policy and prudent monetary policy will continue to focus on supporting the real economy and promoting employment. The recent measures to cut the required reserve ratio should be structural, with greater emphasis on supporting micro, small and medium-sized enterprises and labor-intensive industries to help ease financing difficulties. We will support the use of local government special bonds and other funds to promote key construction such as major projects and basic livelihood projects and take comprehensive measures to ease the pressure of commodity price increase. We will continue to give full play to the role of small and medium-sized enterprises and individual industrial and commercial households in promoting socialized employment, expand employment channels for university graduates, provide more working opportunities for migrant workers, develop flexible employment, and strive to achieve full employment.


What matters in this to commodities is the line about local government special bonds and other funds. Readers will know that one of the more significant areas of credit slowdown over the past six months has been just these bonds. I have noted repeatedly that issuance this year has fallen far below the pace of 2020. So far this year only 30% of the quota has been utilised versus last year’s quote at 70% complete. As well, the quota itself has been cut by 5%.

It’s still not clear why the borrowing has been so weak. Some have posited that local governments were already well-funded. Or, that they were listening to the signals from Bejing about deleveraging rather than following the quotas.

My own thesis is that the Three Red Libes policy for developers, which has significantly curtailed land purchases, which are another very significant local government revenue line, maybe disrupting balance sheets and borrowing. There is another bid developer default today.

The point of this analysis is this: when Li discusses accelerating LGSV bonds, he is talking about an existing quota that will still be down year on year.

Acceleration of borrowing would take away the steeper downsides for commodity demand for a while but not the fact that demand is going to fall, both from falling floor area constructions via developers and infrastructure via local governments in 2021/22.

So, no, this is not yet the panic pivot.

Houses and Holes

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