China is having an exceptionally difficult time managing the narrative.
What began in late 2014 as whispers about a so-called “hard landing,” escalated to a cacophony of jeers last month, when investors (rightly or wrongly) blamed volatility in China for one of the worst Januarys in market history.
Almost nothing has gone right for Beijing since last June when the house of cards that is the country’s equity market casino collapsed on itself following a dramatic unwind in the backdoor margin conduits that helped to channel an additional CNY1 trillion into an already frothy stock market.
An especially absurd state-sponsored effort to prop up stocks failed miserably and then, on August 11, China attempted to transition to a new FX regime. The yuan devaluation sent shockwaves through global markets and ultimately triggered a very “black” Monday on August 24 when the Dow fell 1,000 points at the open in a harrowing bout of flash-crashing madness.
Since then, China has scrambled to restore confidence by, among other things, purchasing trillions of yuan in equities, arresting alleged “manipulators”, and penning dozens of “Op-Eds” that find their way into the Politburo’s various state-controlled media outlets.
Put simply: nothing has worked.
The yuan deval hasn’t rescued the economy (as is clearly evident from the most recent trade data) and if anything, the effort to effect a “controlled” devaluation is contributing to rampant uncertainty and persistent capital outflows.
Furthermore, an unwinding of the country’s massive credit bubble threatens to destabilize the banking sector, which Kyle Bass says will need an enormous recapitalization once NPLs are realized. That, in turn will put further pressure on the currency, which should fall by between 30% and 40% Bass reckons
Against this backdrop China is desperately clinging to the notion that Beijing can navigate the increasingly troubled waters without careening into crisis.
Downside risks are "relatively big," National Development and Reform Commission Chairman Xu Shaoshi admitted, earlier this month, but that won't sop the economy from growing at a healthy clip, he says. Authorities, he continued, will move to curb overcapacity in an effort to root out misallocated capital and that will invariably lead to job losses, but there are no threats to social stability.
On Friday, officials stepped up efforts to reassure the market about the state of China's economic transition. "[China's] top economic mandarins gathered at a historic Beijing guesthouse to present a unified message on the government’s resolve to create a consumer-driven economy and leave behind China’s old formula of relying on cheap exports abroad and infrastructure investment at home," WSJ reports. “If we miss the window of opportunity” to push through the structural reforms, we would suffer severe consequences,” said Yang Weimin, a deputy director of the Office of the Central Leading Group for Financial and Economic Affairs.
Yang went on to emphasize that the next 24 months will be critical if China wants to close "zombie" companies and do away with what WSJ calls "businesses and factories churning out unneeded goods." “Those responsible for overseeing state assets shouldn’t drag their feet just because shutting down those firms would decrease the amount of assets they oversee, and local governments shouldn’t protect zombie firms,” Yang said. Be that as it may, China isn't likely to take drastic measures that will result in social upheaval. "Central bank Gov. Zhou Xiaochuan said the moves must be paired with stimulating demand through monetary and fiscal policies," The Journal goes on to note. "His deputy at the People’s Bank of China, Yi Gang, said the government would be mindful of the effects on employment from drastic restructuring, indicating Beijing is unlikely to carry out any massive factory closures to avoid unrest."
Of course all the rhetoric is sharply at odds with reality. Just last month for instance, TSF skyrocketed as China created a half trillion dollars in debt in just 30 days.
So much for purging speculative excess and unwinding zombie companies. And when it comes to transparency, no one was particularly enamored with Beijing's decision to stop reporting a key indicator of capital outflows (see here).
Meanwhile, in yet another effort to promote the notion that Beijing is serious about stabilizing the economy and financial markets, CSRC chief Xiao Gang has been shown the door. Allegedly, Xiao's face "went pale" last summer when Xi expressed his anger at the way officials handled the brutal selloff that wiped away trillions in paper gains for China's newly-minted retail traders.
Xiao was responsible for the disastrous effort to implement a circuit breaker on markets last month. It was a fiasco and ultimately led to three straight days of sharp declines that in turn triggered volatility in global markets.
Of course Xiao's depature doesn't exactly come as a surprise. Last month, we reported that he had attempted to resign after the bungled circuit breaker incident.
At the time, China denied Xiao would be abdicating his post."This information does not conform to the facts," Beijing said, in response to the "rumors" of Xiao's exit.
We could say the exact same thing about Beijing's commentary on how China is managing what the Politburo wants you to believe is a "soft" landing...