This Monday, the People’s Bank of China (PBoC) did a 50 basis point broad-based reserve requirement ratio (RRR) cut, releasing RMB1.2 trillion yuan (US$188 billion) in long-term liquidity to bolster slowing economic growth. The world’s second-largest economy, which staged an impressive rebound from last year’s pandemic slump, has lost momentum in recent months as it grapples with a slowing manufacturing sector, debt problems in the property market and persistent COVID-19 outbreaks.
As of Tuesday close, HSTECH (+4.2%), HSI (+2.7%), Alibaba (+12.2%), Baidu (+9.8%), Meituan (+5.8%), Tencent (+3.6%). Investors can trade Hong Kong underlying via Macquarie’s warrants listed on the Singapore Exchange.
Here are the excerpts from the Sales & Trading (Macquarie S&T) desk strategy piece published on 6 December 2021.
Macquarie S&T believes that the timing is a bit earlier than expected, but the cut itself is unsurprising given the comment from Premier Li last Friday where he hinted at cutting RRR amid Evergrande debt crisis. Macquarie S&T believes that RRR cut per se is not that important, what is important is the policy signal it carries.
Other than the RRR cut, the widely-watched Politburo meeting also took place on Monday. Every December, China’s top leaders would gather to discuss the economic and policy outlook for the year ahead. The Politburo meeting takes place first, followed by a much larger one called Central Economic Work Conference.
One year ago, the Politburo meeting mentioned for the first time “anti-monopoly” and “curbing the disorderly expansion by capital”. As a result, regulatory tightening became the policy priority for 2021.
This time, the Politburo meeting suggests that the priority has shifted from regulatory tightening to supporting growth. Three things from today’s Politburo meeting caught our eyes.
First, the tone has turned much more dovish
For the first time, the Politburo meeting uses the phrase “stability is the top priority”. In other words, top leaders are deeply concerned about the risk of potential instability.
In the 3Q Monetary Policy Report, due to the concerns on growth slowdown, the technocrats at the PBoC removed the term “stable pace with a positive trend”, which they used in the past six quarters. Now it seems that top leaders share the concerns as well.
Second, this meeting didn’t mention anything on regulation
To be sure, it doesn’t mean that regulation has come to an end. It just means that policymakers have more important things to do.
For instance, the Politburo meeting held in Dec 2017 mentioned for the first time “control the macro leverage ratio”, portending the Deleveraging Campaign in 2018. But the Politburo meeting held in Dec 2018 didn’t mention the word “leverage” at all. It didn’t mean that deleveraging is done. In fact, the deleveraging pressure on shadow banking, local government and property developers remains over the past three years. It means that policymakers had more important things to do for 2019. That is, defending the 6% GDP growth bottom line.
What does it mean for the financial market? It means that while the deleveraging pressure stays, the peak deleveraging pressure happened at the end of 2018. This time, while regulation would stay, the regulatory risk might have reached the peak.
Third, the meeting spells out ways to boost demand
Normally, Politburo meeting only talks about things at a very high level. But this time, the meeting spells out more details on what to do next. For instance, the meeting mentioned the phrase “proactively boost investment”. In the past, the phrase was only used in 1Q20 and 2Q20, when policymakers were keen to stimulate the economy.
Meanwhile, the meeting called for “support the sustained recovery in consumption”. Put differently, it means that top leaders are not very comfortable with the sluggish recovery in consumption so far.
For the widely-watched property sector, the meeting called for “supporting the sound development of the property sector”, “meeting the reasonable demand from homebuyers” and “pushing for social housing construction”. We would not call it a big stimulus, but at least an easing on the margin, or fine-tuning, from the current policy stance.
What all these mean for the year ahead
• Policymakers are clearly concerned about the economy. As such, policy priority is shifting from regulatory tightening to supporting economic growth.
• Both monetary and fiscal policies would turn from tightening to loosening in the coming quarters.
• That said, easing would be still gradual and it’s too early to loosen the controls on property and local government debt. The current growth down-cycle might only hit the bottom around mid-next year, when more easing might come.
• The credit cycle is on the cusp of a new upturn, which could end the policy-induced derating in the stock market, as the case in 2011-2012 and 2018-2019.