Chart of the Week - China Stimulus
The golden lining to China's property market downturn...
As I have been highlighting, China is in the middle of its worst property market downturn in recent history. This is a test for China’s policymakers (and global investors for that matter), and it is a test that many other countries like Europe (post-08) and Japan (90’s onward) have faced and struggled with in the past.
Indeed, I previously dubbed the current property downturn in China as one of the most important global macro swing factors in play right now:
[BULLISH] Stepped up stimulus would be reflationary, boost China’s economy (and the global economy), push up commodities, EM equities.
[BEARISH] (however), a worsening downturn would be deflationary, present headwinds for global growth, and downside risks for markets.
I also said or implored, “expect more stimulus“ — and it seems, we have finally got something there. Late last week, the government announced the following measures to support the property market:
Removed the floor on mortgage rates + cut housing fund interest rates by -25bps (downward pressure on housing loan interest rates)
Reduced the minimum deposit by 5% to 15% for first home buyers —the lowest since the late-1990’s, and 25% for second home buyers (increases purchasing power)
Announced funding measures to enable at least 500bn yuan of purchases of excess apartment inventories and unused land repurchases by local governments and SOEs (increases liquidity, reduces supply)
Those measures are on top of a -50bp cut to the RRR in January this year and -25bp cut to the 5-year policy rate in Feb (a key influence on mortgage rates) — and collectively represent stepped up and notable cumulative efforts, but also a signal that policymakers are alert to the risks and starting to get into action on stemming downside risks.
The simple removal of downside risks is enough to bolster sentiment and we have seen markets rally, but we likely need to see more measures and rapid implementation to really turn things around (and I reckon we will see more eventually: my models suggest the PBOC should cut rates about 150bps, I don’t think they will do that much, but more easing is likely).
Now, onto this week’s chart, while I am bullish Chinese equities — and these measures help the case, one thing that might have gone unnoticed by investors is how the property downturn seems to be a key driver behind the rally in gold prices.
We’ve seen a similar dynamic in the past when Chinese investors rotated out of falling property and into rising stocks during 2014-15.
So the significant weakness in Chinese property prices is an interesting development itself, but the recent stimulus measures and cross-asset price action is very interesting indeed, and global-minded investors need to have these issues well in focus this year.
Key point: China is facing its worst property downturn in recent history, and this has meaningful implications for macro + markets — the recent policy announcements put the bull case for Chinese stocks (and gold) in play.
Also, in case you missed it — see Off-Topic ChartStorm on Chinese Stocks
In this first-time special collaboration between
and the authors present 10 charts on the Chinese Stockmarket (spanning technicals, valuations, macro, sentiment, historical analogs, and positioning) along with clear concise commentary highlighting the Emerging Bull Market in China.Topics covered in our latest Weekly Insights Report
Aside from the chart above, we looked at several other charts, and dug into some intriguing global macro & asset allocation issues on our radar:
Silver: update on the outlook for silver (and silver vs gold)
Agri: checking in on agri commodities + equities
Japan: some similar shapes in Japanese macro and markets
China Property: status update and breaking news (stimulus)
Chinese Stocks: good technicals, valuations, and macro/policy
Emerging Markets: improving outlook, key charts to watch
Subscribe now to get instant access to the report so you can check out the details around these themes, as well as gaining access to the full archive of reports.
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Thanks for your interest. Feedback and thoughts welcome.
Sincerely,
Callum Thomas
Head of Research and Founder at Topdown Charts
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As a reward for those who bothered to read all the way to the bottom of the email, here’s a bonus chart on the Chinese *Gold Market* — this is a close follow-on from this week’s chart….
It shows the current bull market in Chinese gold prices (very retail-driven) against the analog of the 2014-15 Chinese stockmarket bubble. In that episode, a big part of it was the marginal speculative investment dollar rotating out of falling property and into rising stocks (in practical terms, most retail investors in China can only really invest domestically, so the money flows around between the latest hot speculative opportunity).
The key point or thesis would be that you could see a similar dynamic play through again with Chinese retail investors rotating out of (or holding-off from investing in) property and instead speculating on gold (especially with the prospect of more (required) monetary easing). A repeat of the 2014-15 stock bubble would see some prospective 20-30% further upside on domestic gold prices in China, and that would surely ripple across global gold markets (such moves would see US$ gold prices sail above $3000/ounce). Not a prediction, but something to ponder if history repeats.
cheers!
Callum