Earlier this morning we pointed out that with the coronavirus pandemic showing no signs of slowing, and in fact claiming its second offshore death, after a surprisingly young, 39-year-old Hong Kong man passed away, US equity futures soared after the Shanghai Composite managed to stabilize and rebound from the worst drop since the bursting of China's equity bubble as traders realized that Beijing will do as much as is needed, whether adding liquidity, fiscal or outright market support (as we discussed on Sunday) to support if not the real economy which is slowly grinding to a halt, then at least financial assets. And with China's president Xi Jinping making a rare admission that Coronavirus epidemic is a threat to societal stability, the opportunity cost to intervene like never before is nil.
Which is why bulls today can thank the PBOC for the staggering market reversal that has sent stocks 1.5% higher (for now), and which will result in even more gains, because as China's ability to stimulate its economy is now virtually nil, since China's record debt load has now made it virtually impossible to push the country's credit impulse higher...
... Beijing will instead throw the kitchen sink at risk assets and stimulating consumption and borrowing.
So what will China do next? First let's take a look at what Beijing has already done, courtesy of Nomura:
- The PBoC cut the OMO rate by 10bps
- On Monday, the PBoC injected RBM 2.1T of short-term interbank liquidity, which against currently maturing loans, will see total liquidity in the banking system ~ RBM 900B higher than during the same period in 2019
- On Tuesday, the PBoC injected a further RMB 400 billion in reverse repo liquidity, marking the largest single-day addition since January 2019.
- The CSRC suspended securities lending from Monday until further notice, with some funds receiving so-called “window guidance” from regulators to avoid actively selling stocks
- The CSRC told brokerages that their prop traders “aren’t allowed to be net sellers of equities this week” (Bloomberg)
- The CSRC also said it would halt night sessions for futures trading and allow some share pledge contracts to be extended by as long as six months
- The MoF announced an interest subsidy scheme for new loans ear-marked for medical supply companies fighting coronavirus
- The MoF announced policies to extend loans to entrepreneurs and SMEs which have been hit-hard from the coronavirus, as well as potentially delay mortgage repayments or adjust credit policies to repay the loans for those individuals or entities who may have temporarily lost sources of income
So looking ahead, what will China do? According to Nomura’s Chinese Econ Team, expect more policy and fiscal-easing measures to be announced in coming weeks, and of course an avalanche of more money:
- Expect the PBoC to deliver a 50-100bp RRR cut and conduct more MLF operations and OMOs in coming weeks to inject both long- and short-term liquidity into the banking system (this would add RMB 800-1600BN)
- Expect the 1Y MLF rate to be cut by 10bps in coming weeks, which should be reflected in the release of the Feb “Loan Prime Rate” (LPR) to be released Feb 20th
- Expect to see waving, cutting or postponing tax and fee payments for the virus-affect regions, industries, companies and individuals for several months until the virus is fully contained
- Rising likelihood of increasing unemployment and medical insurance benefits for individuals who have lost income or been infected with the virus
- Expect authorities to grow bolder on fiscal deficits and increase the transfer of central government revenues to local governments in virus-affected regions, with Beijing raising the fiscal deficit target as well as raising the annual quota of net local government special bond issuance in 2020
- Expect Beijing to introduce favorable tax policies to boost final demand, such as cutting the auto purchase tax to boost auto production and sales
- Most critically, Nomura expects authorities to give local governments more flexibility in easing restrictions on the property sectors (e.g. price controls, caps on new home purchases and property developer financing), while also rolling-out more favorable urbanization policies to attract talent and migrant workers to large cities to beef up production and consumptions.
The biggest beneficiary of this arsenal of Chinese bazookas? As the chart below shows, it's not Chinese stocks, which are barely up from a year ago. No, the biggest beneficiary is the one "barometer" which Donald Trump believes is all that matters to get him reelected in November: the S&P500.