After ignoring China’s economic vitals for two years, Beijing’s finally charging up the fiscal defibrillator
Meanwhile in Beijing, there’s a distinct too-little-too-late flavour to the latest belated efforts from policymakers to head off the gargantuan fiscal woes of the world’s second largest economy.
At first glance it’d seem China’s central bank, the People’s Bank of China, (PBoC) is finally pulling its thumb out to refuel the country’s dormant economic machine via large shot of liquidity directly into the tapped out veins of mainland financial markets.
And the need is urgent.
That was illustrated Thursday morning, Sydenham time, with fresh data out of Bloomberg which would have made for unpleasant reading in the offices of Chinese President Xi Jinping.
Having started the year badly enough, it appears the combined market cap of China’s once obscenely profitable stock markets have never been so far behind that of the US, as Chinese losses have continued to accumulate like an apparently endless slow motion autobahn pile up.
US equities are now worth circa US$38 trillion more than that of all of China’s combined market caps across the Hang Seng in Hong Kong and the indices across mainland China, a new unholy record for Beijing in a game where victory is measured in comparison to whatever the Americans are doing.
That said, China’s snoozy policymakers are reportedly seeking to deploy about 2 trillion yuan, mainly from offshore accounts of a few go-to Chinese state-owned holding companies which regularly moonlight as actual investment companies – front and centre of what is taking shape as a great big rescue fund to buy mainland shares out of their doldrums.
On Wednesday the PBoC revealed its largest “economic first aid package” in two years.
The PBoC Governor Pan Gongsheng says to expect a roll out of policies boosting commercial property loans which he reckons will offer investors relief from the crushing stress around the ill-fated real estate sector and the consequent hole it’s burned in China’s household wealth.
“At present, China’s monetary policy still has enough room,” the Governor said on Wednesday.
“We will strengthen counter-cyclical and cross-cyclical adjustments, and create a good monetary and financial environment for economic operations.”
Meanwhile, the attention of markets is being absorbed by Beijing’s supposed 2 trillion yuan (US$285bn) market defibrillation fund sourced, as the word goes, by the offshore (and not the domestic) accounts of these state-run financial giants – the China Securities Finance Corporation (CSFP) and Central Huijin Investment Corp – in a bid to cauterise the stock price bleeding which has sapped some US$6tn from mainland markets in a little over three years.
Earlier this week, after making a mug of himself and his stimmy policies at Davos, Chinese Premier Li Qiang got his State Council cabinet goons in a room and drew up a press release saying they’d go be more forceful and cobble together more effective measures to stabilise market confidence.
Most importantly, they then rolled out former market darling/public markets enemy no. 1 in Alibaba founder Jack Ma – who was photographed by waiting finance papparazzi scooping up big chunks of his still Hong Kong-listed Alibaba Group.
This is what lifts market sentiment. Evidence of (unprompted) capitalism.
Other measures like the 50-basis points cut in required cash reserves for banks, which is like getting a circa US$145 billion liquidity injection direct into the into the ailing heart of the banking system, also help.
That’ll start from February 5.
In Shanghai, the benchmark Composite index rallied 1.8% to close at 2,821 while the tech heavier Shenzhen Component snatched 1% after both indices wallowed at near record lows.
Having seen the worst start to a year on mainland markets since 2019, the CSI 300 Index stumbled some 13% last year, driven largely by the crippling fallout of Beijing’s loopy Zero-COVID policies and the emergence of a decades-in-the-making property bubble.
These are bad enough on their lonesome, but the consistently hesitant economic mismanagement out of Beijing has compounded the problem and turned it into a crisis.
So far this year – and there’s only been a few weeks of it – mainland China’s CSI 300 Index has given up 7%.
Spare a thought for Hong Kong, where the crowd pleasing Hang Seng Index – the former bridge to the West where most of China’s commerical and state owned muscle park their stock – has spent January falling off a cliff. It’s down about 11%.
The Hang Seng is at its lowest ebb in 20 years. And all of this has happened under the watchful eye of policymakers who’ve been fiddling up a storm.
They’ve attempted to galvanise confidence by drip feeding a slew of “support measures”, like lowering the stamp duty on stock trades, tightening IPO regulations to limit silly offerings and have slashed the minimum margin ratio for stock purchases through margin financing.
Bejing’s consistently fumbled the task of stabilising the local currency – the yuan – by forgetting to play the ball and not the man, in this case by neglecting to strengthen the yuan at home, and trying to pump out yuan on the global stage in a misbegotten scheme to out-bet the USD as a go-to global currency.
The reduction in required bank reserves comes as officials also wrestle with a spurt of deflationary pressure which has exacerbated the property outlook and helped supercharge the turbulence weighing on markets like the Shanghai SE Composite which has momentarily – at least – bounced a little off its five-year lows.
Now, in an attempt to revive mainland equity markets, Beijing is doing exactly what the Premier told Davos they wouldn’t do – scrabble together a bunch of sugar-coated cash and pour it directly down the throat of ailing markets, when sensible fiscal and monetary resources to support the economy would do more to restore the shot confidence at the heart of the market slump.
That said, after the welcome monetary initiative out of the PBoC on Wednesday, China’s onshore yuan clocked 7.18, proving there’s life yet in the old bones of the RMB.
After the cut, the average weighted RRR for China’s banks will be about 7% and should free up about RMB 1 trillion in liquidity, as per the PBoC Governor Pan Gongsheng.
“(The PBoC will) Continue utilising … tools like the RRR, re-lending and re-discounting, the medium-term lending facility (MLF), and open market operations to provide strong support for reasonable growth in total social financing and money and credit.”
On Tuesday, Bloomberg first reported authorities’ gameplan to mobilise the 2 trillion yuan fund to prop up comatose stock prices.
Most of the money will reportedly come from state-owned firms’ offshore accounts which will be available for purchasing A-shares via the Hong Kong Stock Connect.
Additionally, Beijing’s turned again to those reliable engines of liquidity – like the China Securities Finance Corporation (CSFP) and Central Huijin Investment Corp, which will deploy between them circa 340bn yuan domestically.
Such state-intimate giants like the CSFP and Huijin (which is effectively a holding co for the government’s stakes in financial institutions, like Alibaba’s Ant Financial) are stalwarts of a state-backed super-dooper-fund club and are trotted out en masse as the situation requires to artificially inflate sodden stockmarkets.
This happened in 2015 in 2018 and during COVID.
The intruiging difference this time – aside from the Titanic deck chair shifting of the last 24 months – is that instead of dipping into the vast reserves of domestic sourced financial stockpiles, the firms are going for their significant offshore cash reserves (mostly held in USDs) built up over the previous years of stonking export revenue that wasn’t repatriated onshore.
By drawing on offshore funds to carry the load for mainland markets, Premier Li and his lackeys are back bolstering as best they can the dilapidated yuan.
Huijin, effectively a US$1.25trn sovereign wealth fund, has pledged to do its bit as the authorities reportedly got on the blower to order the major institutional investors not to sell stocks.
According to the Financial Times, Beijing’s intervened as only a Chinese Communist Party-run government can – reimposing net-selling restrictions to ward off a further share price collapse.
Easier than making better companies.