Wednesday, April 1, 2015

PBOC Fueling Chinese Stock Rally (excerpt)

The PBOC is committed to doing whatever it takes to boost China’s flagging economy. The central bank started lowering interest rates late last year and bank reserve requirements early this year. As a result, the China Shanghai ‘A’ stock price index (in yuan) has soared 53.1% since November 19.

Markit reported bad news on China’s M-PMI, which fell back into contractionary territory in March. It sank from 50.7 in February to 49.6 last month, which was slightly above an earlier flash estimate of 49.2. On the other hand, the official M-PMI rose to 50.1 in March from February's 49.9.

On Monday, the PBOC, the housing ministry, and the banking regulator said in a joint statement that buyers of second homes would be required to make a minimum down payment of 40%, down from the previous 60%, as part of efforts to stimulate the housing market.

China new home prices registered their sixth straight month of annual decline in February, as tepid demand continued to weigh on sentiment despite the government's efforts to spur buying. New home prices fell 5.7% y/y in February, according to Reuters calculations based on data from the National Bureau of Statistics. The reading was worse than January's 5.1% decline and marks the largest drop since the current data series began in 2011.

On Sunday, Zhou Xiaochuan, China’s central bank governor, said that he is concerned about signs of deflation and that policymakers are closely monitoring the slowing of global economic growth and declines in commodity prices. He added that the central bank is “vigilantly” ready to battle deflation. The Shanghai ‘A’ stock price index jumped 2.6% on Monday.

In the past, there was a good correlation between the China MSCI (in yuan) and the CRB raw industrials spot price index. They’ve diverged since early last year, suggesting that while slowing growth in China is bearish for commodities, it is bullish for stocks because the PBOC will be forced to ease. Bad news is good news.

Today's Morning Briefing: Bad News Bulls. (1) Breaking bad. (2) Central bank liquidity is the drug of choice. (3) Updating the “insanity trade.” (4) Global stocks move higher as commodity prices move lower. (5) Japan’s CPI and industrial production disappoint. (6) Draghi steps on the accelerator of an accelerating Eurozone economy. (7) Bad news out of China. (8) PBOC eases mortgage terms and remains vigilant about deflation. (9) US stocks marking time while waiting for Fed to do something, nothing, or not much. (10) S&P 500 forward earnings rising again. (More for subscribers.)

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