Monday’s stock market measures by China’s government fall flat. Is there anything else in store?
You can’t accuse economists and analysts of having particularly imaginative turns of phrase. Seemingly out of nowhere, the programmatic, overused «big bazooka» is back and part of our momentary financial market vernacular.
In the current geopolitical constellation, it might seem like a fraught exercise to conjure up an old and extremely obsolete weapon from the Second World War that Allied troops used to ambush enemy tanks with. But here we are and bazooka it is.
This time, the spreadsheet-wielding paragons of supposed economic rationality are using the term to chime in about the possibility of a more forceful and rigorous set of stimulus measures by China’s government to get the domestic economy and financial markets out of the current doldrums.
Flatlining Recovery
To wit, Sunday’s surprise announcement by mainland authorities of a very significant cut (collated Google search) on stamp duties and easier margins for equities trades had a half-life of exactly one Monday lunchtime. At least for foreign investors, the step was seen as little more than an opportunity to sell into rising markets.
As finews.asia commented on, the post-pandemic recovery has well and truly flatlined, and investors need to know that there is more than a big chill ahead. The take by Dalma Capital CIO Gary Dugan on the goings-on in China went straight for the jugular.
«We increasingly believe that the Chinese authorities will not even pay lip service to the needs of Western investors. While the world at large keeps waiting for China to address the issues severely plaguing its economy, the authorities have yet to announce any compelling set of measures that would calm the sentiments and reassure the markets. We increasingly believe that the 'big bazooka' is not coming,» he indicated.
Moving Down
A Citi Global Wealth CIO strategy bulletin indicated that current events in China are going so far as to prompt its investment committee to make downward revisions related to the mainland.
«For the moment, the collective challenges are substantial, as reflected in our revised economic forecasts. A lack of policy action in China during a period of slow inflation and high unemployment risks a self-reinforcing deflation. Under the current circumstances, a Chinese export price plunge would likely reduce global goods prices, reestablishing the prior two decades of tradeable goods deflation that many believed was a thing of the past,» the bulletin maintained.
Natixis CIB Chief Economist Alicia Garcia Herrero linked all the main factors currently ailing China’s economy back to a still smoldering property crisis.
Similar to Japan
«Bursting real estate bubbles never come alone. This is the experience of the US with the sub-prime crisis in 2007, but also that of Spain and the UK slightly later. Japan also had to pay a very high cost from the bursting of its real estate bubble in the early 1990s but in a much more protracted way,» she indicated.
Her view is that the mainland’s current situation is most like that of Japan as it is an external creditor and properties were financed by domestic savings.
«For China, the only way out of this crisis is a slow but painful adjustment both via quantities and prices,» she maintained.
Debt Still Sustainable
A comment by T. Rowe Price’s chief of China and emerging markets macro strategy Chris Kuhlis indicated, however, that he did not believe an outright debt crisis was likely but that the deleveraging process would continue pressuring growth on the mainland.
According to him, the mainland is avoiding a so-called balance sheet recession as borrowers do not have debt servicing constraints. «Interest rate cuts are keeping mortgage and local government debt sustainable,» he says.
In the meantime, a Xinhua statement was published early in the afternoon on Monday. In it, Liu Kun, the finance minister, didn’t seem to have much new on offer other than to repeat that the country intends to «intensify macro regulation and step-up efforts to effectively implement a proactive fiscal policy.
No Bazookas
«In the next step, China will focus on expanding domestic demand, boosting confidence, preventing risks, and pushing for the continuous improvement of economic performance, endogenous driving forces, and social expectations,» he indicated.
Investors are likely to be able to take very little from that, and it may be exactly the intent.
Whatever the case, it also shows that the likelihood of there being any kind of massed, concentrated effort, or anything that looks like a big bazooka going off, is not very high.
