On Monday and in light of a lower than expected GDP growth print of 6.5%, the People’s Bank of China announced it would release a further 150 billion yuan into the economy.

This will be in the form of further lending/prudential relaxations and on top of the 1.9 trillion yuan already accommodated in 2018.

This appears to be a popular technique in China given the Communist Government is still trying to ween the economy off excess debt.

Speaking of high debt, there’s been little let up in share based loans in China.

They are the loans you take to finance the purchase of shares, but you have to pay a margin call (and/or have the shares sold) if the price of the underlying share falls below a certain level.

It is difficult to verify the precise amount of these loans due to transparency issues in China, however I have seen numbers between 10% and 12% of A-shares (domestic listed/traded China company shares).

With the recent belting of Chinese shares, the risk of margin calls is sounding louder.

In response, the Securities Association of China (and a number of securities firms) announced a $100 billion yuan plan to take pressure off some of the pledged shares.

So what?

Despite over 2 trillion yuan in accommodation in 2018 alone (and probably because bail-outs expose cracks as the wallpaper starts to peel off) Chinese listed home and away stocks are re-calibrating.

Although China had an ~0.3% bounce today, Hong Kong is down ~(0.5%)

It seems to me investors so far view these bail-outs as impotent, and this probably means further calibration.

Now what?

It’s clear that US Fed Chairman, Jerome Powell is feeling hawkish, and whilst Donald Trump is accusing Powell of threatening global economic growth by virtue of continued rate hikes (a couple of weeks out from the mid-term elections), Powell’s Fed is seeking to avoid precisely what is happening now in China.

The Fed is moving to normalise the borrowing, spending and consumption behaviour of US businesses and households.

It is doing this through open market operations (interest rate hikes and the balance sheet run-off for the time being).

The Fed is also building up its stock of dry powder (i.e., future interest rate cuts and/or an adjustment to the balance sheet run-off), just in case it needs to intervene in the future.

With US unemployment at 3.7%, more hawkish behaviour is expected from the Fed, and this should favour USD denominated bulk exporters here in Australia (WA in particular) depending on the commodities demand trajectory from a seemingly slowing China.

Mike

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