China's Stimulus Implications
Summary:
China’s Bazooka should touch off rotations with notable consequences for markets.
Reviewing US long bonds, FX, Equities, Oil, Gold, and Copper.
Travel note: I leave tomorrow for Europe to attend a global macro gathering with some buddies, and then in London on Mon-Wed to meet with friends and talk markets. I should have some interesting thoughts to share when I get back — in the meantime if you are in early next week London and want to try to meet up (and we haven’t already connected), just let me know by reply!
China’s Bazooka should touch off rotations
Recapping some key points of China’s stimulus overnight for those who missed the details… #5 is wild, but I think #4 is actually the most important on here:
RR Cut: The reserve requirement ratio will drop by 0.5%, unleashing ~1 trillion CNY of liquidity. RRR may be cut by another 0.25% later in 4Q.
Interest Rate Cut: Interest rates for 7-day reverse repos will fall by 20bps. LPR and deposit rates to fall 20-25bps.
Mortgages: Minimum down payments on second homes to fall from 25% to 15%; annual household interest expense should fall by ~150bn CNY (US$21bn), for 150mn people.
The PBOC to cover 100% of loans for local governments buying unsold homes with cheap funding, up from 60%.
Stocks (new policy): Institutional investors can use assets to obtain liquidity from the PBOC to buy stocks, initially up to 500 billion yuan. Banks are also being encouraged to lend to shareholders for stock buybacks and increasing holdings. PBOC Governor Pan was quoted as saying “we could consider unleashing a second round of 500 billion yuan, or the third batch of 500 billion yuan if the plan were enforced well enough…We are taking an open attitude towards the new policy.”
In classic Pavlovian “fade” ingrained so deeply since the failed reopening trades of early 2023, the initial reaction is skepticism (via Bloomberg):
“It is too far from being a bazooka,” ANZ chief greater China economist Raymond Yeung said of the package. “We are not sure how much the mortgage rate cut will induce a property recovery.”
I think Variant Perception captures the balanced view well here:
The loud and attention-grabbing nature of the PBOC policy surprise hints that the senior levels of the Chinese government have likely recognized the urgency of the need to act. We think this is a tradeable equity rally worth chasing over the next 1-3 months. However, the easing measures do not address China's fundamental problems.
Their comments aren’t wrong — they reflect the incredible economic fallout and damage done to asset prices and animal spirits over the past few years (skepticism and “pop and fade” is to be expected). Those who follow the work of Richard Koo and Michael Pettis will note that China has a balance sheet recession problem driven by collapsing real estate (Koo) which authorities attempted to fight by investing in overcapacity of manufacturing for export, while underconsumption and poor consumer sentiment remain the core problem to China’s imbalances (Pettis). To my mind that’s why Point #4 above remains so interesting: buy unfinished/excess homes and rent them cheaply using central government funding (first discussed here back in May). This has taken time because local governments are hopelessly broke. Now the PBOC backstops 100% of the loan with CGB yields at 2%, this program should move.
TL:DR — there is a window here to engage animal spirits if China follows this up with consumption-focused stimulus in 2025, and in the meantime commodities are cheap as the USD rolls over from an easing Fed.
Some thoughts for the US long bond, FX, equities, oil, gold, and copper…