the pboc articulated its policy stance in a press conference yesterday. pre-emptive easing to avoid a collapse in credit growth, targeting the weakest areas in the economy with sufficient liquidity support were the key policy intents. the consensus rejoiced.
while we understand the consensus’s penchant for a rebound after a weak start for the year, we would not jump into conclusion without looking at market evidence.
many interpreted the recent rrr and interest rate cut as a move to “rescue” the ailing property sector. but the relative performance of the property sector had reached its peak in early 2018 - shortly after the policy mandate of “house is for living in, not for speculation” was announced. and despite aggressive policy easing after covid in early 2020, the relative performance of the property sector continued its precipitous decline – till it found a cyclical bottom in july 2021 (figure 1).
as such, the property sector’s long-term relative performance reflects the policy mandate to remove the “three big mountains” hindering china’s future growth, while in the short-term it has actually been anticipating the current round of monetary easing. indeed, the chinese property index has reached its one-year high recently – a stark contrast to the armageddon headlines in the news.
figure 1: chinese property relative return reached its secular peak in february 2020. but it has been anticipating policy easing since july 2021.
meanwhile, the strength in the chinese yuan (cny) continues to weaken in tandem with falling property investment growth (figure 2). given the policy of “three red lines” is still in place, property investment growth will likely stabilize at a low level from last year’s very high base in the coming months. as the fed ready to tighten while the pboc continues to ease, the cny will likely weaken somewhat. given the historical correlation of the monetary policies between china and the us, the window for large-scale easing is rapidly closing – otherwise the rmb will weaken substantially and can induce speculative capital outflow. such narrowing window explains why the pboc is shifting its easing to an earlier date, and for now will excite traders to punt on such easing expectation before realizing that the cny is an important policy constraint. and market expectation is frivolous.
figure 2: cny vs. falling property investment growth.
source: bloomberg, bocom int’l
our theory of china’s short-term economic cycle is once again validified. china’s short economic cycle runs every three to four years, and it is now in the final phase of slowdown (figure 3). during this phase, the pboc will cut its rrr and interest rate, investment growth will decelerate, forex reserve will peak and the cny will weaken. we have discussed the investment implications of our economic cycle theory in our 2022 outlook titled “”.
in sum, the market has been anticipating the pboc’s easing, as suggested by the property sector’s relative performance rebounding to one-year high. further, the window of pre-emptive easing for the pboc is rapidly closing, as the fed is preparing to hike. it is the reason why the pboc is moving fast. such expectation will spur traders to punt on rates-sensitive assets such as commodities and bonds. stocks can get a fleeting lift, too. after that, china’s decelerating short economic cycle and a hawkish fed should once again be the dominant macro themes that traders focus on.
figure 3. the pboc’s monetary policy cycle is clearly in the easing phase.
source: bloomberg, bocom int’l