The toughest position to hold in the global stock market right now is the “sell China” trade.
Investors are determined to look in the rearview mirror on China. They see major stimulus in 2014 and in 2009 and think something like it is coming down the pike. Every time trade war news looks glum, there is a rumor of some new injection of central bank cash into the system or forced lending that sends the Chinese stock market higher. Monday is as good an example as any. The Deutsche X-Trackers China A-Shares (ASHR) ETF, the biggest volume play into Shanghai and Shenzhen listed stocks, is up 4.2% this afternoon.
“We’re forecasting 6.2% GDP in China this year, but that’s if you get more tariffs,” says Chi Lo, senior strategist for China at BNP Paribas Asset Management in Hong Kong. “If you don’t get new tariffs, then the risk is to the upside.”
It looks like there will be no doubling of the 10% tariffs on the $200 billion worth of goods hit by the Trump administration in September. There is now a new trade truce that some say is good for another 60 days.
Barclays Capital economist Jian Chang thinks Trump will go so far as removing the 10% tariffs, seeing how they have not managed to make a dent in the trade deficit. The U.S. posted another record-breaking deficit with China last year, hitting over $405 billion.
Sorry Xi, Chinese Banks Are Lending Like Mad
Investors are betting on more credit from Chinese banks. Last week, Premier Li Keqiang said he wanted the big four state banks to lend more to small and midsize businesses. Their bet has paid off.
New loans fell to 886 billion renminbi (RMB) in February, falling below market expectations of 950 billion RMB. The major caveat to those numbers is that the decline follows a record high credit dump of 3.2 trillion RMB in January.
The surge in new credit in January was due to the lunar new year holiday. Banks were basically front-running their loans for the next two business weeks. The slump in February’s new credit is because of that early push during the holiday, coupled with top Communist Party leaders like Keqiang pushing state banks to lend to the private sector.
The combined 5.3 trillion RMB in for the first two months of new loans and aggregate financing is higher than the 4.3 trillion RMB pre-stimulus, 2018. Investors are getting their wish.
Nomura economist Ting Lu in Hong Kong says he expects credit to rebound in March and April, but says Xi Jinping does not have the appetite to keep at it. Their room for policy easing is becoming increasingly constrained. Negative demand shocks due to domestic and external factors are also a headwind. Chinese banks seem to have low numbers of nonperforming loans on their books, so past credit splurges have not made for toxic debt loads, apparently.
“We expect the growth slowdown to worsen in the first half of the year,” says Lu. “Only after this point do we think Beijing could deregulate property markets, a policy action we view as the key to growth recovery.”
Taken separately, new loans to companies fell to 834 billion RMB in February from 2.6 trillion in January. The 2017-2018 average for February is 738 billion RMB, so February is still above board.
Of the new corporate loans, new medium-to-long-term loans fell to 513 billion RMB from 1.4 trillion RMB the prior month. Those are down from the 2017-2018 average for February of 630 billion RMB.
Short-term loans for February also fell to 148 billion RMB from 592 billion in January and a two-year average for the month of around 240 billion RMB.
Of the new household loans, mortgage and home equity was 223 billion RMB in new loans for February, which again is way off from January’s numbers and also below the 2017-2018 average for the month of 351 billion RMB.
These numbers suggest that there were a few big budget items that increased loan totals. While mortgage debt is below normal for February, consumer debt on the month was flat. The big credit stimulus may be as big as it gets for China. It’s not going to look like 2014 and 2009.
“Beijing is unlikely to engineer another long, large-scale credit boom due to lower forex reserves, a sharp decline in the current account balance, a big rise in foreign debt, and an increasingly overvalued renminbi,” says Lu.
There’s also the unenforceable “commitment” of maintaining a stable forex against the dollar in case of more tariffs. A weaker renminbi erases many of the costs associated with higher port duties.
Meanwhile, during last week’s meeting of the minds of the Communist Party in Beijing, Keqiang low-balled his GDP growth target to 6%. Last year’s GDP was around 6.6%, though there are many doubters out there, including a new study on China’s economic data by researchers at Brookings.
Lu from Nomura also has his doubts about the near-term trajectory of China’s bull market.
“The current growth downturn could last longer. The recovery is not imminent,” he says. “Beijing will need to deregulate property markets in big cities to eventually deliver a growth recovery in the second half.”
