CHINA TO IMPLEMENT QE?

Takeaway: It remains unlikely that we see anything resembling meaningful monetary stimulus in China over the intermediate term.

We came across a number of articles today that discussed the possibility of China implementing western-style quantitative easing to counter its current disinflationary economic slowdown. In short, we summarily dismissed these rumors and will continue to do so until we see them confirmed by an official source (i.e. the PBoC, State Council, CSRC, MoF, etc.).

 

The powers that be in Beijing are akin to a management team that says what it does and does what it says. More importantly, their official guidance for ~2 years now  has been and continues to be one in favor of avoiding meaningful stimulus – either fiscal or monetary (see: commentary out of the PBoC’s Ji Zhihong on the targeted RRR cut).

 

We would view QE in China as a meaningful deviation from their “prudent monetary policy” guidance and should be interpreted as a signal that China’s intermediate-term growth outlook is actually more dour than current, already-subdued expectations.

 

CHINA TO IMPLEMENT QE? - CHINA

 

CHINA TO IMPLEMENT QE? - GROWTH

 

Chinese policymakers definitely have room to ease with respect to existing inflation and consumer confidence trends, but any easing should immediately filter through to rising inflation expectations given the annualized FX weakness we will see as we progress through this year  – which is in addition to annualized dollar depreciation (the DXY is down -3.3% YoY), as the CNY is still semi-pegged to the USD.

 

CHINA TO IMPLEMENT QE? - CPI

 

CHINA TO IMPLEMENT QE? - CONSUMER CONFIDENCE

 

CHINA TO IMPLEMENT QE? - INFLATION

 

CHINA TO IMPLEMENT QE? - FX

 

All told, it remains unlikely that we see anything resembling meaningful monetary stimulus in China over the intermediate term. Credit growth remains particularly robust and early indicators such as the MAY Manufacturing PMI data suggest Chinese growth is stabilizing here in 2Q (although ahead of what we see as incremental weakness in 2H).

 

CHINA TO IMPLEMENT QE? - China High Frequency GIP Data Monitor

 

Conversely, China’s property market remains an unmitigated disaster, but it’s unclear to what degree Chinese policymakers are incentivized to rush to shore up an industry they’ve previously identified as suffering from overcapacity anyway.

 

CHINA TO IMPLEMENT QE? - China Property Market Monitor

 

In conclusion, it’s pretty clear that China’s current turbulent growth trajectory is a function of very deliberate policy tightening that continues to be unwound, at the margins, via piecemeal fiscal and monetary easing (i.e. increased public expenditures on infrastructure, PBoC OMO and targeted RRR cuts).

 

The more piecemeal China gets with its easing measures, the less likely it is to shift to a policy of broad-based, meaningful fiscal or monetary stimulus – such as the QE package now being bandied about in the press.

 

Perhaps some form of QE is implemented, but is very small in both size and scope (i.e. confined to certain sectors) – which would effectively render it not that meaningful after all. The cost of capital in China is both artificially low and well shy of recent peaks, so it’s unclear – at least to us – what QE would effectively accomplish.

 

CHINA TO IMPLEMENT QE? - 1

 

If anything, implementing something as radical as QE would likely be perceived by market participants could backfire by sending a signal to the market that they are afraid to use traditional tools to arrest the economic slowdown. We underlined the phrase “afraid to use” because Chinese authorities continue to have ample fiscal and monetary scope to ease policy meaningfully; they just would prefer not to, given that the 2009-10 stimulus package is largely responsible for getting them into this mess.

 

A sharp leg down in growth is indeed something that would obviously walk our expectations towards meaningful stimulus out of Beijing, but that's hard for us to get there without relying on doomsday storytelling and a heavy dose of the availability heuristic (specifically the 2008-09 GFC). 

 

For our latest deep-dive thoughts on China and how investors should (or shouldn't) be allocated to this economy, please refer to our 5/13 note titled, "BOOKING RESEARCH ALPHA IN CHINA; TURNING NEGATIVE". 

 

Enjoy the rest of your day,

 

DD

 

Darius Dale

Associate: Macro Team


7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more