Over the weekend, the PBoC was radio silent on a highly anticipated RRR cut and the results, to say the least, were not favorable.
Gulf markets set the tone on Sunday and then from the word "go" in Shanghai on Monday morning until, well, until now, it’s been unabated selling. Selling which spilled over onto Wall Street yesterday and left the Dow down nearly 600 points at the close.
With Chinese stocks still reeling, we got a dual policy rate cut out of the PBoC [8] first thing this morning which is interesting considering that, as Bloomberg reports, the plunge protection national team operating through China Securities Finance has apparently given up on trying to support stocks directly. Here’s what Bloomberg said earlier today [9]:
China has halted intervention in the stock market so far this week as policy makers debate the merits of an unprecedented government campaign to prop up share prices, according to people familiar with the situation.
Some officials argue that falling stocks will have a limited impact on the world’s second-largest economy and that the costs of supporting the market are too high, said one of the people, who asked not to be identified because the deliberations are private. Officials who back intervention say tumbling shares pose a risk to the banking system, the people said.
The Shanghai Composite Index sank 15 percent over the past two days, extending a $4.5 trillion rout since mid-June that has shaken confidence among equity investors around the world. President Xi Jinping’s government is trying to balance a pledge to loosen its grip on markets against the need to maintain financial stability amid projections for the weakest economic expansion since 1990.
"From now on, the CSRC has abandoned the idea of protecting an index level - maybe it's a sign of maturity," one source reportedly told Caixan. "Analysts believe this episode marks the end of Beijing's attempts to directly manage the level of the Shanghai Composite Index. Monday's action has shattered any illusions about the government's appetite for direct intervention," MNI adds [10].
And a bit more from Bloomberg [9]:
“Government intervention has dropped substantially,” Michelle Leung, the chief executive officer at Xingtai Capital in Hong Kong, said in e-mailed comments on Tuesday. “The reform-minded camp within the government that favors letting the market do its work seems to be driving decision making right now.”
Or perhaps not, as indicated by Tuesday morning’s desperation rate cuts.
It appears as though, on the heels of comments the CRCS made earlier this month which indicated that, although the plunge protection team would linger in the background "for years," intervention would only come during times of extreme dislocations and stress, and while one might well be able to argue that Monday and Tuesday most certainly qualify, the global attention that China’s CNY900 in billion direct interventions have garnered looks to have left the CSF feeling gun shy.
So what’s a central planner to do?
Well, if you're Beijing, one thing you can try is a simultaneous policy rate cut, which is exactly what we got on Tuesday morning.
Part of the aim is quite obviously to free up liquidity, which has suffered in the wake of China’s frequent open FX ops. We got still more evidence of the liquidity shortage last night when the PBoC decided to conduct CNY150 billion in reverse repos. Just last week we remarked on the extraordinary effort [11] to inject cash via a CNY120 billion reverse repo and another CNY110 billion via medium term lending facilities (which, incidentally, the PBoC indicated it is looking to use again earlier today).
But the PBoC likely hopes it can kill two birds with two stones (to adapt the analogy). That is, by bundling a lending rate cut with the RRR cut (which the PBoC also did in June [12]), the central bank may be trying to send a forceful message to the stock market while freeing up liquidity at the same time.
If the market gets the message (or perhaps "takes the bait" is the better way to put it), investors will take solace in the move, Chinese stocks will find their footing, and the CSF can quietly fade into the background for a while. That way, should the meltdown begin anew down the road, China can intervene directly with the national team and point to the fact that it hasn’t done so in quite some time.
So in short, the dual policy rate cut looks to be an effort to i) free up liquidity being sucked out by China’s FX interventions to support the yuan, and ii) shore up confidence in the stock market without resorting to direct purchases of equities on the part of CSF.
We suspect the effects may be short lived on both accounts because after all, aggressive easing only fuels further depreciation necessitating further liquidity-sapping FX interventions in a vicious loop (as Commerzbank's Hao Zhou put it this morning, "the side effect of monetary easing is the deprecation pressure on CNY"), and loose monetary policy likely won’t be much comfort to China’s 90 million retail investors who now, more than ever before, are virtually guaranteed to sell any rip they can get in a desperate attempt to claw back their life savings which they naively poured into stocks back in April and May.
