MV Weekly Market Flash: Vigorous...
Back in September, the financial press called it a “blitz.” On September 24 the People’s Bank of China, the country’s central bank, announced a series of measures to stimulate the moribund Chinese economy. Among the few initiatives mentioned by the PBOC with any specificity was a planned $114 billion fund (a “war chest” in the patois of the military terminology-loving media talking heads on CNBC) to be lent to asset managers and the like to buy shares in domestic Chinese companies, presumably on the notion that animal spirits in equity markets should somehow spill over into feistier household spending on goods and services in the real economy. Sure, we’ll go with that. Domestic Chinese stock indexes, having been in the dumps for most of the year to date, skyrocketed on the news. The CSI 300, an index of companies listed on the principal Shanghai and Shenzhen stock exchanges, soared 15.7 percent that week for its best performance in more than 15 years. By October 8, the CSI 300 had gained 32.5 percent from that September 24 announcement. Without a single weapon being pulled out of that putative war chest!
Things haven’t been all that great for investors in Chinese equities since then, though, and pity the poor folks who followed the advice they were getting from the talking heads on October 8 to just buy anything in sight that had its home in Shanghai or Shenzhen.
To continue with the military arcana so beloved by the financial media, the “blitz” and the “war chest” are all well and good, but what the market really needed to see was a “bazooka.” A big armament chock-full of specific fiscal measures to get Chinese shoppers back in the habit of spending like crazy instead of setting records for high savings rates. Lack of adequate health insurance and insufficient pensions are among the reasons why Chinese households have some of the highest savings rates in the world, not to mention the housing and property crisis, three years old with nary a solution in sight, that has wreaked havoc on real asset values. Dealing with a consumption crisis this deep requires more than throwing a bunch of state-funded money at Chinese companies via equity share purchases; hence the need for the fiscal bazooka.
Investors thought they finally might be getting the goods this week, when Beijing’s monetary policy mandarins met at the Central Economic Work Conference, a two-day confab probably as sleep-inducing as the name suggests. Shares on the CSI 300 crept up during the week but dropped like a dead weight today when the stated pledge to “vigorously boost consumption” and expand demand in “all directions” was not backed by any specific fiscal policies to achieve that outcome. Vigorous words indeed – and actually saying that domestic consumption would be a top policy priority isn’t nothing, given its usual position way down the pecking order below manufacturing and exports. But no bazooka.
China’s economy really does need a major boost, and this is true even if the worst-case (and meaningfully possible) scenario of being on the losing end of a trade war with the US doesn’t come to pass. China’s inflation rate currently stands at 0.20 percent. That’s annual inflation – the change in consumer prices from twelve months ago to today. By comparison, consumer prices in the US currently rise by more than that every month. The headline US Consumer Price Index for November, as reported earlier this week, gained 0.30 percent from November 1 to November 30. China is flirting with deflation, the economic malady that knocked Japan for more than a decade in the early 2000s.
The bazooka may yet be hauled out, because the Chinese authorities may have no choice. But there is a reasonable chance we won’t get any meaningful details before the next plenary meetings, likely to be the Two Sessions conferences in March next year. Meanwhile, investing in China is likely to continue to be a bumpy ride with plenty of downside room.