Late into Friday's major market selloff, a completely unfounded rumor emerged out of nowhere, seeking to rekindle the BTFD spirits, that with central bank intervention from both the BOJ and ECB already priced in, and with the Fed still in taper mode (if not for much longer should the S&P dump accelerate), that the last central-planner wildcard, China, would join the fray and a major monetary gusher would come out of Beijing over the weekend to halt the slide. Alas, we have bad news for said BTFDers: just hours before futures are set to open on Sunday afternoon, the chief economist at China’s central bank said Saturday that he doesn’t see any reason for large-scale fiscal or monetary stimulus “in the foreseeable future” despite slowing growth in the world’s second-largest economy and disagreements about the depth and timing of economic overhauls.
According to the WSJ, the PBOC's Ma Jun, speaking in Washington at a meeting of the Institute of International Finance - the same place where Jamie Dimon said that he is concerned about shadow banking - said the Chinese job market “looks pretty stable” despite wobbly economic growth. That's up to debate, but it was what he said about leverage in certain sectors — including real estate, certain state-owned enterprises and local-government financing vehicles — that was already too high, and that further lending to these areas should be avoided.
Ma Jun, chief economist at the People’s Bank of China, shown in September.
We have covered the critical state of China's debt-stock consistently since 2009, a country whose corporate debt is higher than any developed or developing country, so while we wholeheartedly agree with Jun, one question emerges: why tell the truth? After all, the only reason the status quo managed to survive so long is because it piled lies upon lies upon propaganda. If indeed the times has come for the truth, then all bets are off...
And while in Beijing, debate about how to manage the country’s slowdown has been intense, so far the monetary authority has not been involved apart from rumors and innuendo. Furthermore, it was in late September when hopes flared that China would join the easing fray following news that the existing PBOC governor, Zhou, would be replaced with a far more pro-stimulus candidate. However, so far that has not materialized.
The People’s Bank of China so far has bolstered the economy using narrow stimulus measures, including targeted lending in sectors like agriculture and public housing. But The Wall Street Journal reported last month that Chinese leaders are considering replacing the central bank’s governor, Zhou Xiaochuan, as part of internal battles over whether larger-scale expansion of credit should be used to spur economic growth.
Mr. Ma on Saturday instead emphasized the importance of reforms to prevent slower growth from turning into a broader crisis. The government is working on improving the productivity of state-owned companies and better controlling their spending, he said. Beijing also is endeavoring to allow more companies both public and private to go bankrupt, which is “warranted,” he added.
Clearly, this is a major market negative. As for future growth, Mr. Ma said China has “interesting bright spots” including tech and health care, which he predicts will rise to above 10% of GDP from 6% today. “I think the chance of a hard landing is very low,” he said, referring to worries about a sharp slowdown in China’s economy.
Part of China’s “new normal,” he said, is that “big stimulus” won’t be called for every time growth decelerates. “And secondly, the new norm will involve a lot of rebalancing in terms of changing the economic structure.”
If that is indeed the case, one can now forget about any Chinese monetary intervention. Or rather, one can forget about such intervention until such time as the Chinese housing market is in freefall, at which point China's 1+ billion society will be on (if not beyond) the edge of out right revolt. To say that the PBOC will not get involved at that point is certainly naive. However, to gether there, there will be blood on the streets, metaphorically when it comes to the New York stock exchange in Mahwah, NJ and literally when it comes to China.