IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY

Takeaway: The PBoC’s recent tightening of monetary policy is in-line with our call for China to take a brief trip to Quad #3 on our GIP model in 4Q13.

SUMMARY BULLETS:

  • By refusing to auction new reverse repo contracts, the PBoC is tightening monetary policy, on the margin, by allowing liquidity to drain from the financial system on a net basis (-102B CNY over the past 2W vs. a trailing 13W average of +29.7B CNY and +150B 3W ago).
  • Aside from increased confidence stemming from the fact that the Chinese economy is on sounder footing, there are three primary reasons why the PBoC is implementing this strategy at the current juncture:
    1. Hawkish trends in the property market;
    2. Continued excesses in credit expansion; and
    3. A hawkish outlook for CPI over the intermediate term (unlike the politically compromised Fed, which uses lagging indicators to set monetary policy, the PBoC proactively adjusts monetary policy according to its growth and inflation outlooks).
  • As such, money market rates are increasingly reflecting this shift by the PBoC. To the extent this continues, our call for Chinese growth to slow in 4Q13 is strengthened. Leading indicators for Chinese growth are starting to signal this even in the face of this morning’s solid HSBC Flash Manufacturing PMI print (50.9 for OCT vs. 50.2 for SEP).
  • The insider-dominated Shanghai Composite Index (another one of our preferred leading indicators for Chinese growth along with the 10Y-2Y spread on MoF paper) is now bearish from an immediate-term TRADE perspective. The index is also failing to recapture its late-MAY highs – something we need to see before we think it’s safe to sign off on a buy-and-hold mean reversion strategy for Chinese equities.

Please note: If you have yet to review our SEP 25 note titled, “THE DEVELOPING BULL CASE FOR CHINA: PROGRESSING”, we encourage you to do so. The latter half of the report wraps some numbers around why we have yet to adopt an explicitly bullish fundamental bias on China after officially dropping what had been an overtly bearish bias back on SEP 6.

JUST CHARTS:

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China PBoC OMO

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Real Estate Climate Index

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Total Social Financing

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - CHINA

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Money Market   Rates Monitor

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Iron Ore  Rebar and Coal YoY

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China SHCOMP

Feel free to ping us with any follow-up questions.

Darius Dale

Associate: Macro Team