One of the biggest, if not the driving, factor behind the latest bout of the "reflation trade" which has sent bond yields surging (not to mention sending the Chinese stock market into outer space) in a deja vu rerun of the "Great Rotation" of 2013 and 2014, was constant chatter of imminent monetary easing by the People's Bank of China, and perhaps with good reason: with the Chinese economy hard-landing and growing according to some estimates as low as 1.6% [13], the Chinese housing market tumbling faster [14]than that of the US in the great financial crisis, the media has been flooded with recurring reports of Chinese QE any minute. [15]
To be sure, the PBOC has given plenty of ammunition for such speculation, having cut both its interest and Reserve Ratio rates twice in 2015.
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As a result of constant jawboning that the PBOC may not only cut rates even more but proceed to launch QE (which it will ultimately, just not for a while), both the Shanghai Composite has been trading at multi-year highs and oil has found a bid strong enough that in the past two months it has surged by some 50% on hopes that Chinese demand will finally come back once the local economy is so weak it leaves the PBOC no other choice.
However, two things suggest that the great "reflation" trade is ending.
Overnight, Xinhua reported [17]that after months of plunging housing sales, the all important Chinese housing market, where the bulk of Chinese net worth is located, is rebounding sharply: sales volume of new homes in China's major cities posted a solid gain in April with the support of the recent policy easing, the latest industry report showed.
New home sales in China's 30 major cities including Beijing, Shanghai, Guangzhou and Shenzhen surged 15.1 percent in April from the previous month to 16.57 million square meters, also representing an increase of 30.8 percent from the previous year, according to the report released by E-house China R&D Institute, a leading property consultancy.
Of the tier-one cities, Beijing witnessed the strongest new home sales growth at 70.7 percent in April compared with a year earlier, noted the report released Wednesday.
Xinhua recounts that China's property market took a downturn in 2014 due to weak demand and an excess of unsold homes. In late March, China's central bank cut the minimum down payment requirement for second home buyers to 40 percent.
Business tax will be exempt for sales of homes purchased more than two years ago, instead of the previous requirement of five years, the Ministry of Finance announced. These easing measures have bolstered the recent rebound of the real estate market, analysts said.
Policy easing should further lift home transactions in the months ahead, with a strong rebound expected in the second quarter, predicted Yan Yuejin, a researcher with the institute.
In other words, what the PBOC has already done may be quite sufficient to claim victory for the near to mid-term future, to where no additional easing, much of which has been factored into global asset prices, is forthcoming.
But where things get dangerous for the liquidity-addicted, risk-on crowd, is a report just released by Reuters [18], according to which, China is "likely to resort to fiscal stimulus to revive growth after a run of monetary policy easings proved less effective, policy insiders said."
"They are very worried. If they don't take bolder measures, it will be very hard to achieve the full-year growth target, and there is risk the slowdown may get out of control," an economist at a well-connected think-tank said of top policymakers.
"Fiscal policy will become more forceful, and infrastructure investment will accelerate, while monetary policy will be more flexible," said the economist.
Confused by the 5% drop in the Shanghai Composite in the past two days and the worst 6-day run since June 2013?
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This may explain it:
The emerging view is that the direct impact of government spending would work where monetary policy, including two cuts in interest rates and two cuts in bank reserve requirements since November, has not.
The government is eyeing "a package of measures to stabilize growth and control risks", said a senior economist at the cabinet's Development Research Centre think-tank.
"There is no big problem in employment. They (top leaders) are more worried about financial risks and debt risks."
If true, expect the dramatic doubling in Chinese stocks to promptly deflate because while fiscal stimulus is indeed great for the economy it does absolutely nothing for a market that desperately needs constant liquidity injections merely to stay at the same level, nevermind keep rising.
The level of fiscal stimulus detail provided by Reuters suggests that indeed hopes for more PBOC interventions have been officially snuffed. To wit:
The National Development and Reform Commission (NDRC), the country's top planning agency, is already speeding up investment projects in several key sectors, including water conservation, environmental protection, power grids and health care.
And President Xi Jinping is spearheading the integration of Beijing with Tianjin and Hebei province, aiming to create a growth driver similar to the Yangtze River Delta around Shanghai and Pearl River Delta in Guangdong, the sources said. The government has said the new metropolis would require investment of 42 trillion yuan ($6.8 trillion).
"It's hard to boost consumption while external demand is weak, so the only thing they can do is boost investment," said Lu Zhengwei, chief economist at Industrial Bank.
The NDRC has been struggling to lure private investment into such projects, adding more pressure on the government to spend.
Needless to say, China already has a massive overcapacity problem as a remnant of its late 2000s policy of a massive, debt-fueled spending binge that has now left the country with trillions of (mostly undisclosed) bad debt, and a mountain of shadow liabilities the Politburo is desperate to eliminate. Reuters confirms as much: "Stimulus plans will, nevertheless, be restrained by the fact that China is still struggling with a mountain of local government debt from the 4 trillion yuan ($645 billion) stimulus rolled out in 2008/09 to cushion the impact of the global crisis."
Which means that while monetary stimulus is now firmly on the backburner, not even fiscal policy will match the massive stimulus dumps seen in previous years, which in turn suggests that anyone hoarding oil over hopes that China will reemerge as a massive source of demand will be disappointed.
As for the sudden bout of the great reflation trade... well, just keep an eye on Chinese stocks - leaking inside information in the Middle Kingdom is usually encouraged, and if someone is aware of the PBOC's plans, or lack thereof, it will sweep like wildfire through the market, and lead to an avalanche of selling as the liquidity tsunami is drained.
