And to very little fanfare China’s central bank on Tuesday lopped the top off the country’s key mortgage landing rate in a refreshingly transparent effort to restart its flatlining economy with a shot of property buying direct into the heart of the matter.
To some mild surprise, but very little reaction, the People’s Bank of China (PBOC) announced that China’s major lenders had cut their 5-year loan prime rate (LPR) by 25 basis points to 3.95%.
After holding out for… well, for who knows what, this cut to the cost of borrowing was the first since June last year and more importantly, it was the biggest-ever cut to the key mortgage reference rate.
This means a few things:
Officials have just said bugger it – let’s get everyone borrowing again, and sort the economy’s structural issues out later.
China’s falling property prices have apparently frog-leaped a bunch of Beijing’s other problems – which is good, (but which this stimulus might not entirely address.)
There is a hint of panic about how easily officials have returned to the ‘turn on the taps’ approach to economic encouragement.
Property: Beijing’s big problem
According to Fitch, new home sales across China collapsed by as much as 15% last year.
Via X
The headline arrest of property executives, the high-profile developer defaults and the interminable death of property giant China Evergrande has naturally traumatised market participants.
Consumer confidence isn’t the problem, it’s consumer paranoia.
Chinese consumers are anxious
Property was their safety net and it’s got some pretty awful holes in it.
Now, with money tight, the broader domestic economy is replete with people either trying to save or trying to pat debt.
It looks a lot like Japan’s did when a booming Tokyo slid quietly into ‘balance sheet recession’ and disappeared from the world economic stage for 10 years during its super-weird “Lost Decade”.
Already a large swathe of Chinese businesses and consumers are tightening their belts, avoiding silly spending or investing and doubling-down on clearing debt.
That kills liquidity and the domestic economic butter churning but it also means no-one wants to borrow – not even with the LPR getting slashed.
Hopefully, President Xi Jinping’s fiscal smoke signals will become loud hailers and – as usually happens – everyone in China will be singing from the same hymn sheet any day now.
Big Trouble in all the little parts of China
Beijing’s latest efforts to haul its economy out of the post-COVID quagmire follow a humiliating GDP escape last month when the world’s second largest economy barely slipped past narrowly beat its miserly GDP target of 5%, its lowest in decades.
And market watchers fear China’s Year of the Dragon is unlikely to bring the luck it’s supposed to.
Shadow banking is running amok again while the ongoing property market crisis lurches from one bad idea to the next.
Exports are grim and perhaps most problematic – international investors have been pulling out of Chinese markets with an abandon never before seen.
However James Gerrish at Market Matters continues to believe that Beijing will deliver ongoing targeted stimulus through 2024.
The sort of support, he believes, must “eventually stimulate growth.”
The real false dawn
The Shanghai Composite rose again on Tuesday, extending gains from the previous session as investors reacted to the PBoC decision.
The market’s been at five-year lows for a while now.
James says the move on the LPR could change all that.
“Interestingly, after several false dawns over the last 12-months, the rate cut failed to impress investors – we believe it might be the very time they should take notice.
“The cut in the LPR was the largest since the reference rate was introduced in 2019 and far more than expected, but this time, investors sold into any strength on the day as opposed to 24-48 hours after the stimulus, i.e. the Shenzhen CSI 300 index advanced just +0.2%.”
The BofA fund manager’s survey from the 8th of February, showed global players are still very bullish on equities – most especially tech and the members of Wall Street’s “Magnificent Seven”, but – James notes – are also short Chinese equities.
This is in fact the second most crowded position after the array of bullish bets on Messrs Microsoft, Nvidia, Meta et al.
Market Matters maintains its position that it is a a matter of when, not if, we see an aggressive squeeze higher by Chinese stocks, which would flow through into Australia’s materials heavy markets.
With iron ore at a three-month low overnight, that narrative is yet to play out.
“(It’s) a bullish read-through for the Resources Sector, that is so far not listening to our view.”
But evil is patient. And so should anyone with an eye on China.
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