China's Economic Slowdown Response

Would you call this 'stimulus'?

• August 14th, PBOC announces a surprise rate cut.

• August 27th, China orders state banks/fund to buy equities after Evergrande (China's largest property developer) opens down 90% after filing for bankruptcy in NY court.

On the first measure - surprise rate cut - they walked some of that expectation back that could have helped their troubled real estate sector and delivered a very small cut:

China’s central bank cut their 1 year loan prime rate by just 0.10% & left the 5 year rate unchanged, leading investors to surmise that the government is more interested in protecting bank profits than in stimulating the economy.
- The Economist

On today's announcements related to backstopping their stock market, these policy moves are indirectly simulative to Chinese sentiment and potentially consumption, but is the Chinese weak economic data is such dire straights as many pundits expect China to enter or already be in a recession?

China faces the risk of two major economic/financial problems coming together … and having them fuel and be amplified by financial instability:
First, insufficient domestic growth drivers in the face of external headwinds; and
Second, long-standing pockets of excessive debt and leverage turning into system-wide detractors of growth, confidence, and capital availability.
@elerianm

All true - China has massive debt and economic growth concerns.

China’s total nonfinancial debt-to-GDP ratio is at 297% (as of late 2022, according to BIS statistics)—nearly 43 percentage points above the ratio in 2016, when the Japanization risks of China were first seriously debated. Moreover, as we learned from the painful experience of Japan, economies facing a declining workforce must boost the growth rate of productivity in order to maintain solid GDP growth. For China, that means staying away from vigorous stimulus of an overly leveraged property sector, while accelerating the pace of long overdue State-Owned-Enterprise reform and providing more support to private sector confidence.
Stephen Roach

BUT consider: Most DMs approach money as throw-away, as in they print to backstop their bonds and then once the velocity hits escape mode they have the resulting problem of inflation. That’s called the law of natural consequences.

China appears weak from many angles, but often (manipulated) perspective is not reality.

Also China has a LOT of money, and capital controls to keep that money ring-fenced.

But the biggest potential advantage China has – monetarily speaking – is they are NOT monetizing bad debts like the US and Europe. I’m not the only one suspicious of this ‘pile-on China recession’ narrative.

Nice read by @Gavekal https://t.co/VLwWUf1aC5

Craig agrees that a CNY devaluation would risk capital flight and a strong USDCNH would hurt banks buying Chinese equities. More likely, China tries to soften around the edges to 'simulate' Chinese consumption while they wait to see what happens with US yields, inflation and dollar strength.

Another words, it looks like to me they are trying to buy time while waiting for US yields to soften. T

hat's a gamble.
And it doesn't negate the fact that China's economy is slowing down, requiring China to intervene with more liquidity most likely.

And I think, long story short, that is why we had the outsized volume of call buying in FXI and KWEB last week. They knew PBOC had to do something! Now we see if it sticks in open interest or fizzles out, much like the stimulus they promised.

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