Markets might have welcomed the announcement of Spain’s budget plan but it wasn’t the only event that sparked risk appetite on Thursday. China helped inspire risk-taking too! Market junkies say that speculations about further easing from the People’s Bank of China (PBOC) also fueled the rally in higher-yielding assets, including the comdolls.
The central bank has been aggressively pumping liquidity into the economy this year, cutting benchmark rates and the reserve requirement ratio (RRR) multiple times. In the past, lower inflation figures usually got markets excited about monetary easing from the PBOC. So what had investors speculating that the Chinese would soon ease monetary policy this time around?
For the most part, it was the drop in the country’s industrial profits. The National Bureau of Statistics reported that profits of the biggest Chinese industrial companies were lower by 6.2% this August compared to last year. Not only was the decline bigger than the 5.4% annual drop for July, the net total profit of 381.2 billion CNY for the month also translated to the lowest profit intake for the year!
Wait a sec! You might be wondering why the report encouraged risk-taking when disappointing Chinese economic data usually lead to risk aversion since it implies slowing Chinese growth.
Well young Padawan, it would seem that the bad news convinced a bunch of market junkies that the PBOC would soon pump more money into the economy following the bank’s most recent move.
On Tuesday, the central bank injected 365 billion CNY into the money market. It has been conducting regular open-market operations twice per week by offering reverse repos. However, the amount it pumped into the economy in repurchase agreements translated to the bank’s biggest weekly monetary injection we’ve seen, EVER.
Consequently, the move made investors hopeful that the PBOC would continue to ease monetary policy. Remember that such actions help lower borrowing costs for companies to help them cope as business conditions worsen. Market junkies probably felt reassured that the PBOC would actively support the economy as growth slows down. After all, China seems to be the only major economy left that still has significant room for easing.
This humble not-so-old man begs to differ though. Putting the 365 billion CNY into context, it only translates to a measly 0.4% increase in liquidity of one RRR cut. More importantly, the move implies that the PBOC is stuck within a rock and a hard place much like the Fed and the ECB (both of which have already promised unlimited bond purchases to support their economies).
To me, it reflects the PBOC’s inability to go back to more aggressive easing measures that it did ever so often in the earlier part of the year. The ill-effects of interest rate and RRR cuts have limited the central bank’s moves to more modest actions such as reverse repos. Remember that China runs the risks of increasing its debt and skyrocketing consumer and house prices if it aggressively increases the money supply.
This is why I don’t think disappointing Chinese data would continue to spark risk appetite in the future. But then again, that’s just me. I’m curious to hear what you guys think. Hit me up in the comment box below!