As we observed yesterday when we showed that if comparing the collapse in China's housing market with that of the US following their respective peaks..
... then China is already a recession, we added that "as shown in the chart below [China] has recently engaged in several easing steps, with many more to come..."
Sure enough, just a few hours later, the PBOC announced its second Reserve Requirement Ratio (RRR) for all banks since February 4, when China had its first industry-wide RRR cut since May 2012. The move will be effective Monday, April 20.
Incidentally, this is the first time in history that China has been easing its monetary policy into a surging stock market, as the chart below shows.
Perhaps more notably this was the biggest RRR-cut for China since November 2008, and everyone knows what was going on back then.
While the move was not unexpected and follows Premier Li's vow last month to actively step in if the economic slow down begins to hurt jobs, as well as the PBOC's hint yesterday that the PBOC has room to act, the size of the cut, which will unleash CNY1.2 trilion into the market or about $200 billion, was far bigger than most had predicted.
“This RRR cut is much bigger than the market anticipated and banks will be flooded with liquidity,” said Liu Li-Gang quoted by Bloomberg, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “It will also add fuel to the already red hot stock market.”
Other commentators, clearly long "of stocks", were just as giddy: “The move is positive, showing policy makers are trying to offset the impact of potential capital outflow and stabilize the macro environment,” said Helen Qiao, Hong Kong-based chief greater China economist at Morgan Stanley. “The 100 basis point cut shows the intensification of policy easing, which is warranted given the sharp slowdown.”
And since none of the recent PBOC easing has done anything to arrest the collapse in the all important housing market, more interest rate cuts are forthcoming.
But is it really about the economy?
Recall that on Friday Chinese equity futures crashed after the close following news that the China Securities and Regulatory Commission (CSRC) put out an announcement which tightened up rules governing certain trading on margin while simultaneously liberalized rules on short selling. The tighter margin rules applied to a category of investors using what are known as 'umbrella trusts' where leverage has expanded greatly in the last 6 months.
This kind of margin has now been ruled illegal going forward (the margin rules for ordinary citizens not using these vehicles have not been altered). The rise in Margin looks somewhat like the rise in the number of new accounts being opened at the brokerages. The week of Apr 10 it was 850k, versus just about 100k a year earlier.
The CSRC also increased the number of issues eligible for short selling from about 900 to 1100 in the same announcement. In the few years that either margin or shorting have been allowed, the practice of shorting in China has not caught on at all like the use of long margin.
The result of these moves prompted Evercore ISI to comment that: "after a near 100% rise in Shanghai equities over the last year, any rule tightening would likely yield an immediate correction. Monday is likely to be a bad day in the Chinese markets. And maybe all week."
Well, not so fast.
Terrified it had just popped its equity bubble prematurely, overnight China’s securities regulator "moved to allay fears that it intends to kill a breathtaking rally in the country’s stock market, just one day after it warned small investors about trading risks and expanded the use of a mechanism that bets against stocks."
As the WSJ reported, "the abrupt about-face betrays a dilemma faced by the regulator between cooling a market that has doubled over 12 months and causing panic among vulnerable retail investors that account for the vast majority of stock trading in China, analysts say.
In a statement published on Saturday evening, the China Securities Regulatory Commission said measures rolled out on Friday, including tightening rules on margin lending and promoting the use of short selling, aren’t aimed at clamping down on a red-hot market.
The measures are about “maintaining the healthy development of the market,” the CSRC said in the statement. “They aren’t intended to encourage short selling, let alone depressing the market...the market shouldn’t over-interpret the measures,” it added.
In other words, the Chinese market may be "red hot", but please don't stop making it even redder. Because as long as China is unable to halt its housing hard-landing, it will gladly take an equity bubble in lieu of a housing bubble if that helps preserve the people's wealth (the problem being that in China only 25% of household assets are in financial products - 75% is in financial markets, something which as we showed before is inverted in the US).
Which is why any attempts to offset the bursting housing bubble with a stock bubble in China will fail.
But it won't keep it from trying, and if yesterday's CSRC announcement was designed to halt the selling seeing on Friday, then the PBOC rate cut hours ago cements it. Call it China's "Bullard" moment.
But perhaps the biggest question is what happens with the Renmibni next: because on one hand China desperately needs to weaken its currency to boost exports and stimulate its mercantilist economy which due the CNY's peg to the soaring USD has lost its competitiveness, yet on the other as many have suggested (us included) beneath the surface China is currently suffering a massive capital outflow, one which a weaker currency will accelerate, leading to an even worse outcome for China: a sequence of events which ultimately will culminate with the launch of the "final" QE.
Expect the Friday selloff to be more then BTFDed as soon as China opens for trading in a few hours, and the SHCOMP to surge even higher and to even more unsustainable, and centrally-planned levels, merely pushing back the day of reckoning by a few weeks or months, as yet one more bank scrambles to preserve the "wealth effect" by artificially pushing its stock market higher..