China Watch: Elevator Up, Elevator Down… The Most Hated Rally in History?
Good morning from Copenhagen, and welcome to our weekly “China Watch,” where we look at the Chinese investment case through the lens of Western investors.
A few weeks ago, I wrote that China was bringing chopsticks to a gunfight and that the stimulus was insufficient. Investment flows initially disagreed, and “hot money” from mainly Western accounts piled into China in huge volumes. However, remember that this money can leave just as quickly, as we saw yesterday. I would like to see local flows buying into this story, but that’s not happening yet.
I still believe the stimulus package is incredibly underwhelming relative to the problem at hand. However, it seems the authorities in China understand they need to feed the feedback loop regularly to keep momentum alive. At least, that’s the simple takeaway from the announcement of a new fiscal briefing after some of the worst 24 hours in Chinese market history.
Let’s take a detailed look at what they’ve announced so far, how they plan to implement it, and whether it’s sufficient to deal with the problem at hand.
The short but clear conclusion is that this is still far from a “whatever it takes” moment.
Has the PBoC Announced a QE-Lite Setup? Not Really.
The stimulus package has been labeled the “Pan Package,” as Pan Gongsheng of the PBoC took center stage in the announcement.
The so-called “equity recovery program” has probably delivered the most bang for the buck so far, with a $113bn wallet size leading to a surge of over $2 trillion in local market capitalization. But what is this program really? Is it QE, and are we guaranteed that the $113bn will make it to the markets? The answer to both questions is a resounding no.
Chart 1: China Got a LOT of Bang for the Buck with the Equity Stimulus Plan
We saw the worst day in the Hang Seng since Lehman yesterday, but China used the opportunity to “feed the rally” with something to look forward to—a briefing on fiscal stimulus on Oct 12. Here is a comprehensive overview of the far-from-impressive stimulus announced thus far.
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