Over the weekend, when commenting on the latest rather disappointing RRR cut out of China (which would release just enough liquidity to offset liquidity drains via the MLP and repo) we pointed out another, far more important event which took place in late December, when traders were generally away on vacation, and when the PBOC indicated a critical shift in the official monetary policy description at the December Central Economic Work Conference, from “prudent and neutral” to “prudent with appropriate looseness and tightness”.
While the language sounds fairly similar, the new description is surprisingly similar to what was adopted in 2015, just as monetary policy eased significantly and ahead of the famous “Shanghai Accord” of January 2016 when, as the world was careening to a bear market, a coordinated response from G-7 leaders and China sparked a massive rally in stocks as China unleashed another major monetary easing burst which impacted the global economy for the next year. Furthermore, as Goldman adds, “such official policy language, while subtle, can carry important information about the monetary policy stance.”
Which is why, as we commented on Sunday, “while traders were focusing on the latest words out of Fed Chair Powell, is the real “risk-on” catalyst the hint out of China that a new “Shanghai Accord” may be imminent? The answer is most likely yes, especially if the upcoming US-China trade talks fail to yield a favorable outcome, as the alternative would be even more pain for China’s economy.”
So now that we know that the latest trade talks indeed led to no tangible outcome, it increasingly does appear that something big is brewing behind the scenes, because as Charlie McElligott wrote this morning, on top of the expected RRR-cut last week, today we see a fresh “sources” story on Bloomberg according to which the Chinese MoF is said to propose a wider 2019 fiscal deficit amid the slowdown (2.8% for 2019 vs 2.6% in 2018).
Additionally, the MoF is open to the deployment of “special bonds” to finance local government projects for infrastructure, while not affecting the overall government budget, all clearly with the purpose of injecting a far greater fiscal stimulus into the rapidly slowing economy than markets may be expecting.
Finally, as Bloomberg reports, “Rare China Schedule Changes Suggest Major Policy Meeting Is Near,” noting that a rescheduling of the Chinese regional legislative meetings has not occurred in more than four decades and indicating that President Xi could be readying for a new Plenum this month, which in the past has been used to signal major reforms.
So while there is one key unknown – namely whether the US and the rest of the world will participate in what is shaping up to be a major stimulus a la “Shanghai Accord 2016” – it is increasingly looking like China, alone or with others, is preparing not only for a a major fiscal stimulus, but concurrently the telegraphing of a major economic “reform”, one meant to provide a major push to the local economy.
As for the rest of the world, with most developed economies rapidly slowing, and with Trump desperate to delay the coming recession as long as possible…
… it is just a matter of time before the key financial policymakers meet behind the scenes, and just like in January 2016, cobble together another major stimulus response, especially since unlike 2016, the world’s central banks are not only no longer stimulating the global economy…
… but are currently in the process of draining liquidity from the global market.
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