... In Which SocGen Starts A Rumor That The Next QE Will Come From China

Tyler Durden's picture

The US is tapering, with the Fed knowing any further monetization of private sector bonds will lead to a crash in the already illiquid bond market;

Japan is stuck with its massive QE, jawboning every day a rumor that first appeared in November of 2013 (and which sent the USDJPY 500 pips higher and has so far been nothing but a lie) that it may do more, but has unleashed such a firestorm of imported inflation, plunging real wages and collapsing exports that there is nothing Abe or Kuroda can do to boost the Nikkei "wealth effect" or halt what now appears an almost certain 2014 recession;

Europe, too, saw a rumor emerge in November 2013 that it would also launch QE, however it won't: instead the ECB just went NIRP and is threatening to do ABS purchases, which just like the OMT pipedream will never happen simply because there aren't enough unencumbered assets to monetize (most of which are already have liens with local banks) while an outright QE would require redrafting Article 123;

So what is a world starved for "outside money" to do? Why make up another rumor, this time focusing on the last possible source of QE: China.

For that rumor we go straight to the source, SocGen, and its Alain Bokobza, who said on location in Hong Kong that "for the first time on my trip I fielded a question on whether China could or should do QE, perhaps as the ultimate tool to quell (rational) fears about sky high leverage."

And now let the rumors that China is launching QE begin

Full note from SocGen:

My taxi driver from the airport seemed to have been inspired by a formula one driver, speeding along in his forty year old gas-fuelled, noisy Toyota. Don’t panic, I’m still alive, just. Thankfully, the cab was at least air-conditioned, a must here in Hong Kong, the hottest (35-37°C) and most humid city so far on my mini tour of Asia.

The day started with a lot of attention from the press attaché at SG’s regional headquarters, an ace at organising interviews with the best of a local media ever keen to meet exotic foreigners still attired in those quaint jackets and ties and speaking with a peculiar French accent (the taxi ride didn’t help). While not one but two beautiful ladies spent 10 minutes applying make-up (bah!), I watched the CEO of Wendy's telling the story of how his company thrives in the kitchen of the vast global fast food industry.

Discussions here were not only very lively but also very global and very multi asset. The regional head of a German wealth manager suggested his local employees should get a day off if Germany wins the cup. Only one day? What do the Argentineans bid?

As the Hong Kong economy is 100% pegged to the US dollar and thus to Fed Funds, everyone seems to have a clear view of US monetary policy and Overweight is the default position on US equities (SG recommends Neutral). Managers are concerned about the potential negative impact of tighter US policy on EMs. And investors in this former colony of the British Empire are also on high alert for policy tightening in the UK by year end. We all easily agreed that UK gilts and equities have to be Underweight relative to Europe – all the while keeping a keen eye out for Sterling appreciation.

Europe was the subject of much animated debate. While many scenarios on likely outcomes remain open, we came to the clear conclusion that peripheral markets had to be preferred to UK assets. Alas, despite some interest, we didn’t find the time to focus on the radical policy shift which started in France mid January.

For the first time on my trip I fielded a question on whether China could or should do QE, perhaps as the ultimate tool to quell (rational) fears about sky high leverage. Central government carries little debt at 18% of GDP, but this jumps to 40% if you count the debt of the railway system and other quasi sovereign debt. Local government debt is around 60% of GDP, but the biggest worry is the recent increase in non-financial corporate debt from 150% to 180%. The Chinese consumer, by comparison, barely registers, with debt amounting to 10% of GDP. For now, policy makers have explicitly put growth drivers at the forefront of the policy agenda to ward off a hard landing. Perhaps paradoxically, we generally agreed that China equities are among the most attractive assets in the world.

Japan has similar borrowing levels but most of it is public debt. Questions arose on the third arrow (structural reforms) and its impact on asset pricing. SG’s Asia economist thinks that even if all the reforms are executed, it would only lift the potential GDP growth rate from 0.75% to 1.25%, hardly the stuff of dreams. Our market positioning on Japan is not aggressive (see Postcard from Tokyo).

The ranks of the ultra wealthy in Asia continue to grow. Asian wealth managers are seeing 10% annual growth in AUM. Compared to Europe the rich in Asia are on average much younger (45 vs 60) and many are self made, although some are second generation tycoons. The wealthy in Asia are on the whole comfortable with a very high risk profile, while rich Europeans are generally risk averse on Japan and Europe. Local asset managers appear significantly weighted in US assets, especially equities.

The taxi driver on the return journey was just as inspired as the one who drove me into town. Happy to report I arrived alive at what is one of the biggest shopping malls in the world with a couple of runways tucked into a corner.

Best wishes

Alain