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CNHUSDCNH

When it comes to China, fiscal is the main game

Chris Weston
Head of Research
Aug 15, 2023
China has been front on mind, with concerns around a slowing economy amid a lethargic response to roll out the highly anticipated fiscal support post-Politburo. Concerns around Country Garden and Zhongzhi Enterprise Co have also impacted sentiment with a credit event firmly on the radar after Country Garden missed a coupon payment and have until 6 Sept to obtain the cash.

One of the big issues is the lack of impetus from the government to go hard on the support levers. That needs to change, or Chinese equity markets will find sellers into strength and ultimately trend weaker. A bazooka-type stimulus is certainly not on the cards, but a coherent, coordinated, and structured stimulus is possible and progressively demanded by the market.  

Preview

Today’s July high-frequency economic data showcases why the market lacks any conviction to buy anything China-related. Industrial production slowed to a 3.7% annualised run rate (from 4.3%) and missed consensus expectations by 60bp. Retail sales grew a meagre 2.5% (vs 4% eyed) and this seems the data point to view going forward, given we heard today from Cai Fang (a policy maker at the PBoC), detailing that the top priority now is to stimulate household consumption. 

The incentive for a reversal in demand needs to happen; the sooner the better. 

July property and residential sales were woeful (vs expectations) and again feeds into the need to do more on the property front. 

The silver lining?

Media reports are doing the rounds that Country Garden is liaising with bondholders to extend repayments on a bond maturing 2 Sept by 36 months. We’ll see if can result in a lift in Country Garden’s offshore bonds, many of which are trading at 7 or 8 cents in the USD. The equity market will watch credit markets, as this pricing suggest a default is a done deal.

The PBoC are not waiting

We may be waiting for the fiscal measures to impact but the PBoC is not hesitating on the monetary policy side – on the day, we’ve seen a 15bp cut to the 1yr MLF (Medium Lending Facility) to 2.5%, as well as a 10bp cut to the 7-day repo rate to 1.8% - neither were expected today. Granted, the consensus view was that we’d see policy easing through Q3, but the PBoC has taken the decision to not hang about. 

Preview

USDCNH has rallied to 7.3120 and despite the PBoC’s best efforts to limit the upside with a CNY ‘fixing’ 671p stronger than market estimates, few in the market are selling USDCNH. The market are desensitised to the daily CNY fixing (each day at 11:15 AEST) and have come to the view that if the PBoC really meant business in its quest to drive the yuan higher they could run down part of its $3.2t. I am happy to stay long this cross. 

We’re also seeing solid outflows from China in HK through the Northbound ‘connect’ and this has been a consistent theme for the past six trading sessions – it's little wonder USDCNH is rallying as capital moves offshore. 

Chinese equity isn’t buying into the monetary policy easing and we see a heavy tape. Fiscal is the main game in town and the market wants headlines to work with, right now. The governments call to stop publishing youth unemployment numbers today, is also weighing on international capital, as transparency concerns resonate. For index traders headlines matter – when they come, we look at signal vs noise… keep your eyes peeled. 

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