Bad News Is Now Good News In China As Market Awaits Stimulus

By George Lei, Bloomberg Markets Live reporter and strategist

China’s May PMI survey flashed the latest warning of mounting economic trouble, prompting investors to eagerly weigh the odds of more stimulus out of Beijing. Onshore equities have already relinquished the vast majority of their post-reopening gains, adding pressure on policymakers to move fast and aggressively to promote growth.

The yuan, stocks and commodity prices have fallen since late April, a reflection of China’s pessimistic economic prospects, Shao Xiang and Tao Chuan at Soochow Securities wrote in their WeChat public account on Wednesday. History suggests monetary policy rarely “stands idly by” once manufacturing PMI stays below the 50 threshold for two or more straight months, they pointed out.

The PBOC took actions in 2019, 2021 and 2022 when the factory gauge worsened — including reductions to the Required Reserve Ratio (RRR), the Medium-term Lending Facilities (MLF) rate and Loan Prime Rate (LPR). These actions occurred either during the same month or one to two months after the data was out, the Soochow analysts noted.

The PMI data confirmed China’s post-Covid recovery is “far from a self-sustained one, due to a lack of confidence among corporates and households,” according to Macquarie analysts Larry Hu and Yuxiao Zhang. “Now policy is the only game changer,” they said in a research report on Wednesday.

Beijing will either need to get its stimulus package in shape in the coming weeks or risk a sharp year-over-year downturn in the next quarter, according to Evercore ISI. The lockdown of Shanghai, which took place between April and May of 2022, weighed heavily on the Chinese economy and the low base of comparison suggests 2Q GDP will “look great” in year-over-year terms despite ongoing headwinds, analysts Neo Wang and Gin Wang noted.

Consensus forecast puts the pace of expansion at 7.8% year-over-year in 2Q and 5.1% in 3Q, according to a Bloomberg survey. Evercore ISI believes “it makes more sense to announce stimulus taking effects when 3Q arrives,” while Macquarie sees an “RRR cut, acceleration in infrastructure spending and more relaxation in property policy” in the weeks ahead.

Still, whether PBOC will cut MLF or LPR remains a close call given the expectations for another Fed hike in June, Macquarie cautions. More data deterioration may be needed before Beijing makes up its mind.