China's broad stock indices were flip-flopping between gains and losses from the open (although securities firms continued to get monkey-hammered on more tightening by regulators) heading into the avalanche of data that hit at 2100ET. GDP growth - which was estimated at sub-7% based on real-time hard-date - was released/leaked 10mins early - rising 7.3% YoY in Q4 (just beating expectations of a 7.2% rise) but grew only 1.5% QoQ (missing the 1.7% expectation). Then came Retail Sales - beating by the most since May 2014 with a 11.9% YoY gain (against 11.7% expectations). Industrial Production grew at 7.9% YoY (beating expectations of 7.4% by the most since July 2013). Of course the fact that Chinese GDP growth of 7.4% YoY was the weakest since 1990 was entirely ignored as the immediate reaction was Yuan and Chinese equity strength.
Stocks were flip-flopping...
- 2025ET *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.1% TO 3,114.56
- 2031ET *CHINA SHANGHAI COMPOSITE INDEX RISES 1.1% TO 3,150.10 AT OPEN
- 2038ET *SHANGHAI COMPOSITE INDEX PARES GAIN TO 0.1%
- 2041ET *SHANGHAI COMPOSITE INDEX DROPS 0.3% BEFORE GDP DATA
- 2045ET *SHANGHAI COMPOSITE INDEX FLUCTUATES, RISING 0.2%
- 2047ET *SHANGHAI COMPOSITE INDEX RISES 0.8% AS PETROCHINA GAINS 2.7%
- 2054ET *SHANGHAI COMPOSITE INDEX RISES 1%
- 2058ET *SHANGHAI COMPOSITE INDEX EXTENDS GAINS, RISING 1.4%
And then the data hit...
Chinese economic growth BEAT AND MISSED
- *CHINA 4Q GDP RISES 7.3% Y/Y: CBN - Beat
- *CHINA 4Q GDP GROWS 1.5% Q/Q: CHINA BUSINESS NEWS - Miss
BUT...
Chinese economic growth has not fallen below 7.6% since 1990, when it grew 3.8% following international sanctions in the wake of the 1989's Tiannanmen Square massacre.
As The FT reports, [12] The new numbers mark the first time since 1998, when the economy was buffeted by the Asian financial crisis, that growth has slipped below the Communist party’s annual gross domestic product target, which was set at “around” 7.5 per cent for 2014.
The only other year official growth has been below the target since the government began publicly announcing them in 1985 was in 1989.
[13]
As recently as 2010, the Communist party estimated it needed annual growth of at least 8 per cent to avoid job losses and social unrest that could threaten its grip on power.
But when it announces its 2015 GDP target in March, the party is expected to lower it to “around 7 per cent”.
After a change in methodology last year, the World Bank and International Monetary Fund estimated China’s economy would surpass that of the US in 2014 in terms of purchasing power parity.
Retail Sales beat by the most since May 2014...
[14]
Industrial Production beat by the most since July 2013...
[15]
* * *
Bloomberg's Tom Orlik noted that their real-time-date tracking estimates of GDP implied a sub-7% growth print...
China GDP data 10am Tuesday Beijing time. Consensus forecast 7.2% Our monthly tracker suggests less than 7%. pic.twitter.com/sY3EDd2M3H [16]
— Tom Orlik (@TomOrlik) January 19, 2015 [17]
But don't forget, credit growth re-accelerated in December...
A turning point? China credit growth re-accelerates in December pic.twitter.com/5fDjpCW0x1 [18]
— Tom Orlik (@TomOrlik) January 15, 2015 [19]
Providing just enough magic fairy juice...
* * *
But away from real (or made-up) fundamentals, markets are 'volatile'
Chinese securities firms are getting monkey-hammered again tonight:
- *CITIC SEC SHARES FALL 9.99% TO 26.66 YUAN IN SHANGHAI
- *HAITONG SEC. SHARES FALL 9.74% TO 18.71 YUAN IN SHANGHAI
- *EVERBRIGHT SEC. SHARES FALL 7.56% TO 22.50 YUAN IN SHANGHAI
Following media reports of delays in regulatory approval of margin term extensions:
- *CHINA MAY DELAY NEW MARGIN TRADING ROLLOVER RULES: SEC. JOURNAL
(in other words - securities firms could not lock in term financing on their margin accounts which implictly means tightening of credit).
In addition, China's first USD-based corporate bankruptcy continues to ripple through markets withe courts freezing assets:
- *CHINA COURT SAID TO FREEZE 640M YUAN OF KAISA DEPOSITS
Court in northeast China froze 640m yuan of deposits belonging to Kaisa Group Holdings as banks seek loan repayment in two separate lawsuits, say people familiar with the matter.
Dalian Intermediate People’s Court, in Liaoning province, froze 540m yuan of Kaisa deposits Jan. 12 as part of lawsuit filed by ICBC, according to the people, who ask not to be identified because order hasn’t been made public
Same court ordered 100m yuan frozen Jan. 9 as part of suit against Kaisa by China Everbright Bank, people say
* * *
Of course BofA was quick to suggest that the only reason PBOC has not cut the RRR is because stocks have rallied so much... and so now that stocks are falling, they can cut rates...
Following news over the weekend that China's CSRC suspended new margin account openings for three of the nation's largest brokerages and punished another nine brokerages for improper operations on margin financing, China's on-shore A-share markets slumped with SCHCOMP down 7.7% on Monday. Though we believe China's A-share rally since July 2014 was to a large extent justified by rising expectations on reforms and policy easing, we did believe that the rally was too rapid, was overly reliant on enthusiastic retail investors, and that the surge of margin financing was worrisome.
We were especially concerned that China's much needed monetary easing is being delayed by the rally as policymakers are afraid that any high-profile easing measures could unduly fuel the rally. With the correction yesterday and possibly in the next couple of days, and with the sharp fall in the PBoC's foreign exchange purchase, we believe the chance of an RRR cut is rapidly rising in the next couple of weeks.
The dark side of China's stock market rally
China's A-share market is heavily dominated by retail investors (accounting for more than 80% of transactions), while the average share of margin financing in daily total turnover increased to 16% in December from 15% in November and 11% in January-October 2014. As of last Friday, outstanding margin financing loans were at RMB1.1tn, up from just RMB400bn at the end of July 2014. The A-share surge is surely good for equity financing, as evidenced the rising number of IPOs, but we believe the downside risks should not be ignored: (1) Some credit has been channeled to stock markets for speculations instead of the real economy. The strong total social financing in December could be partially driven by the A-share rally as some entrusted loans might have been used to feed the feverish stock markets via margin financing or other channels (see here). Actually the new CBRC regulations on entrusted loans released last week were aimed at closing this loophole. (2) The rally prevents the PBoC from conducting necessary monetary operations.
Easy as that!! When stocks are up, it is 'justfied'; when stocks are crashing it enables the PBOC to cut RRR which means stocks should go up... Thank the lord for Central planning.
And voila...
- *CHINEXT INDEX RISES 1.9% IN SHENZHEN, HEADING FOR RECORD CLOSE
- *SHANGHAI COMPOSITE INDEX EXTENDS GAIN TO 2%
Magic. Good news is good news and bad news is good news.
US equity markets jumped a little (as did gold) but they are fading back a little
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