(WCTW) Moderately Loose? No, I'm Not Talking About The Oil Market. Buckle Up, It's About To Get Real.
What China wants, what China gets.
Early this morning, China's Politburo announced a meaningful strategic economic policy shift. The most important change was in monetary policy.
Source: Bloomberg
In particular, the wording change was from "prudent" to "moderately loose", a term they have not used since the 2008 to 2010 great financial crisis. This sudden strategic change was something many of the close China watchers saw coming.
Since we started writing about China back in October, we have been repeatedly disappointed by their fiscal stimulus announcements. Please see the following 3 articles we wrote on this:
(Public) China's Incredibly Out-Of-Touch Stimulus Policy
(MEMO) Memo - Observations From China And The Investment Implications
(WCTW) This Feels Pretty Serious
In our last China update, I wrote the following:
When the Obvious Comes
There will be a day when the obvious comes. If my thinking is correct on this, China will eventually announce meaningful fiscal stimulus. And when it does, commodities across the globe will shine again. Natural gas will shine via global LNG prices. Coal prices will balloon. Oil will shoot higher just as non-OPEC supplies start to peak. And the pain of the commodity investor will pay off.
But when is that obvious moment going to come?
I don't know the precise timeline. But if I had to guess, I think it will be after Q1. Unless China announces more meaningful stimulus announcements by year-end, the recent announcements will fizzle, and economic growth will worsen again.
I don't think it will be long. And when the economic data worsens in the face of all the current stimulus announcements, policymakers will turn from "out-of-touch" to "I am f***ing desperate". That's when you know the tide has turned. Until then, position accordingly.
What's particularly interesting about the timing of the latest announcement is that if you have followed China's economic data, they have already worsened. China is still experiencing deflation, its bond yields are plunging matching that of Japan's post-bubble era, and consumer confidence remains extremely low. Despite all the rhetoric during the October announcement, the economic momentum we saw already fizzled and businesses remain on the sidelines due to uncertainty.
Thankfully, Chinese policymakers did not wait another quarter before realizing the announcements so far are lackluster. The reality is that without more fiscal stimulus announcements, China's economy will continue to falter. While it won't fall apart, the lack of growth in itself could spiral the economy into a lost decade (or longer).
What changed?
Aside from the obvious monetary policy stance change to "moderately loose", the most meaningful part of the announcement came from President Xi Jinping himself. He said: