You’re familiar with ‘Bad news is good news” markets from the behavior of U.S. stocks during the last year on negative news about U.S. economic growth. The market’s rallied on many bad news days on the theory that weaker than expected U.S. economic growth would keep the Federal Reserve from cutting back its purchases of Treasuries and mortgage-backed securities and put off any increase in short-term interest rates.
It looks like China is headed into that same kind of “bad news is good news” direction. I think it’s a little early to proclaim that this logic is in the ascendant but I do think traders are starting to think that more bad news about China’s economy is a good thing because it pushes up the start of stimulus from the Chinese government and the People’s Bank.
The latest evidence is in the reaction to a weaker than expected Purchasing Managers’ Index for the manufacturing sector from HSBC and Markit Economics. The survey, which precedes the official government data, dropped to 48.1 for March. That’s below the 48.5 reading for February and below the 48.7 consensus among economists surveyed by Bloomberg. It also marked the fifth straight monthly decline. (In this survey any reading above 50 indicates expansion and anything below 50 indicates contraction.)
Stocks in Shanghai initially fell 0.2% on the news but then rebounded to close up 0.9% for the day.
The official purchasing managers index from the National Bureau of Statistics and the China Federal of Logistics and Purchasing is due on April 1. In February the official index came in at 50.2, still on the side of expansion but also an eight-month low.
According to a Bloomberg survey, the consensus growth forecast for China’s economy for the first quarter of 2014 among economists fell to 7.4% in March from 7.6% in February.
So far whatever the market might be starting to anticipate, the Beijing government isn’t talking stimulus. Earlier this month, the State Council said that new spending wasn’t in the cards, but that the government might front-load existing spending programs.
I still think it’s likely to be June or July before the government and the People’s Bank actually announce any new concrete stimulus programs.
But it sure looks like the market will anticipate those moves long before they actually materialize.
It sure looks like the People’s Bank is tightening again.
China’s yuan was down 0.4% against the dollar at one point yesterday. That brought the currency’s decline to almost 1% since Wednesday, February 19. For most currencies a 1% drop in a week isn’t a huge deal. Just normal volatility, the markets would say. But this is the yuan, the very tightly managed yuan. China’s currency doesn’t move up or down unless the country’s central bank decides to let it move. So the move has set off loud alarm bells: Are we looking at a new policy move by the People’s Bank of China designed to 1) limit speculation in the currency, 2) pave the way for a wider trading band than the current daily maximum of 1%, and 3) reduce upward pressure on China’s money supply.
It’s the last that is making the markets the most nervous. Add a decision (if that’s what it is) to let the yuan fall together with figures from the People’s Bank showing it drained 100 billion yuan ($16.3 billion) from the financial system in the past week and you’re got solid evidence that the central bank has decided to tighten–again.
And that might be evidence that the People’s Congress, meeting next week, will announce a growth target for 2014 lower than the 7.5% target for 2013. Thinking here is that a lower growth target would give the central bank more room to tighten monetary policy.
All this is just starting to ripple out through Chinese financial markets—if only because any conclusion that we’re witnessing a shift toward tightening of the sort that knocked China’s equity markets into a bear in 2013 is so tentative. Read more
This can’t be good.
Yes, Chinese stocks were up again last night with the Shanghai Composite Index adding a gain of 0.8% to finish the week up 3.5%. That’s the biggest weekly advance in five months.
But bad loans at Chinese banks rose for a ninth straight quarter to the highest level since the 2008 financial crisis, the China Banking Regulatory Commission announced on February 13. Bad loans rose by 28.5 billion yuan ($4.7 billion) in the last quarter of 2013 to 592.1 billion yuan ($97.6 billion.) Officially, bad loans now account for 1% of total loans, up from 0.97% in the third quarter.
Of course, nobody believes the official numbers, but even the official trend is headed in a bad direction. This week Standard & Poor’s said that it expects loan quality to continue to decline in 2014. Some analysts are even more pessimistic. Changjiang Securities in Wuhan, for example, expects the deterioration to continue for two more years, according to Bloomberg.
And there are a lot of loans in China that could go bad Read more
What’s ahead, sell off or panic?
After today’s action I think we can take “buy on the dip” off the list of alternatives.
Everything is down today—with the surprising exception of the Shanghai Composite index, which closed up 0.6% overnight.
At 3 p.m. New York time, the Standard & Poor’s 500 index was down 1.56% and the Dow Jones Industrial Average was off 1.55%. Mexico was 1.31% lower and Brazilian stocks were down 1.1% in Sao Paulo. In Europe the German DAX had tumbled 2.48% by the close of that market; in Milan Italian stocks were down 2.30%; and in Spain the IBEX 35 index was lower by 3.64%.
In Asia Hong Kong’s Hang Seng closed down 1.35% and Japan’s Nikkei 225 was off by 1.94%
Among other emerging markets Turkey’s BIST 30 index was lower by 1.74% and South Africa had dropped by 1.36%.
What’s going on? Read more
U.S. financial markets are closed today, January 20, for Martin Luther King Day, but that doesn’t mean there’s no market-moving news.
The big story today is China where new numbers from the National Bureau of Statistics released overnight show GDP growth slowing to 7.7% year over year in the fourth quarter. That’s a slight drop fro the 7.8% growth rate reported for the third quarter, but it was slightly above the median estimate from economists surveyed by Bloomberg.
Other figures released today confirmed this slight slowdown in the quarter. Read more