On Friday China’s ruling body, the Politburo, suggested that it thought less stimulus might be needed since the economy had recovered its footing. Instead policy should focus on deleveraging China’s banks and corporate balance sheets, and on avoiding speculation in the housing market. This follows on news from the People’s Bank that the supply of cash from the central bank to the markets would be less than expected. The bank rolled over only half of the funds coming due through one of its longer-term policy tools, instead substituting more seven-day money.
As you might expect stock traders weren’t happy. The combined Shanghai and Shenzhen CSI 300 Index fell 2.3% on Monday for its biggest loss in a month. Property developers, state-owned industrial companies, and banks–all sectors that soar when the stimulus tap is expected to open–fell. The CSI 300 is still up almost 40% this year.
There’s really nothing new here. The government and the People’s Bank have been engaged for, what, two years or more, in a balancing act that strives to provide enough stimulus to the economy to keep growth above 6% and that seeks at the same time to reduce speculation and cut leverage. If that sounds hard, it’s because it is. And that has kept policy bouncing between announcements of more stimulus and statements emphasizing the need to reduce leverage and speculation.
How far the market will twitch on the latest swing is the question. China analysts are suggesting that Chinese stocks could be looking at a two-month period of consolidation after the latest news. Note that’s an expectation for consolidation and not a plunge in these markets. But if you’re interested in adding to a portfolio’s China weighting, as I am, you might want to wait to see if any strong trend to the down side develops in spite of expectations for nothing especially drastic at this point. After the move like this, there’s a lot of profit that can be taken so selling is a very attractive option for many traders–if something suggests that risk might be rising.
You might especially watch to see how this latest balancing act plays with the end (?) of trade talks between the United States and China.