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EM by EM #40: Chinese Promises and Mexican Traps

As we conclude a busy midweek with loads of matter to digest in a global macro we will this week attempt to make an odd synthesis between the recent events in China its importance for price action and how we look at it going forward and Trump's success in New Hampshire and how we are currently framing the 2016 campaign in the context of the EM space
2024-01-24
<a href="https://stenoresearch.com/author/emilmoller/" target="_self">Emil Møller</a>

Emil Møller

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While it comes as no surprise that there is a noticeable emphasis on boosting market sentiment in response to the recent violent sell-off that Chinese authorities have attempted to counter through various legislative measures and adjustments – including short-sell bans, heightened supervision of companies with inadequate dividend payouts, promotion of buybacks, and, more recently, state fund interventions – the reported sums circulating in the markets these days remain remarkably high.

If the intention was to bolster market confidence, it is safe to say that the initial response has aligned with those objectives- However, it is crucial to recognize that the recent turbulence in Chinese risk assets is indicative of more profound issues. Relying solely on state fund interventions to artificially inflate market values is not a sustainable, let alone prudent, approach to address the underlying challenges confronting the Chinese economy.

Back before Christmas, I wrote the following highlights for a piece on China for 2024:

“- Foreign confidence remains a massive issue for investment and equity pricing. Efforts for diplomatic damage control seem to be a cheap option when contrasted to the domestic issues related to adding more leverage to the system as an alternative

– Domestic confidence is arguably even lower with households seeing little light at the end of the tunnel. We can see why they won’t. Unless there are major changes in real estate policies or ambitious measures, we don’t expect a significant boost in private consumption. Therefore, fiscal policy is likely to take center stage in 2024.

– Monetary policy will aim at balancing a backstop of the insolvencies within the financial system whilst adding as little pressure to the Yuan as possible and accommodating increased financing needs for the state. Still, we think 2024 will offer gradual front-end cuts”

Not how that last sentence has essentially proved to be the first pawn that the Chinese leadership has chosen to move, which implicitly proves that the 2023 preferences are still intact: The Exchange rate matters, and the capital flight needs to be backstopped and that remains the priority vs easing the burden on the rate-sensitive sectors that are currently dragging the economy down. The reduction in the Reserve Requirement Ratio (RRR) injects liquidity into the financial system while maintaining a level of stability in the fixing process. This marks the deployment of the first tool in the anti-crisis arsenal

Chart 1: China RRR

 

As we conclude a busy midweek with loads of matter to digest in a global macro we will this week attempt to make an odd synthesis between the recent events in China its importance for price action and how we look at it going forward and Trump’s success in New Hampshire and how we are currently framing the 2016 campaign in the context of the EM space

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