Chinese stocks surged as investors reacted positively to massive government efforts to revive the country’s ailing economy. Haining Zha, Vice President and Director, Asset Allocation at TD Asset Management, speaks with MoneyTalk’s Kim Parlee about why these measures may be different than previous stimulus efforts and the potential market implications.
Print Transcript
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* Chinese stocks have been surging in recent days, including a session earlier this week that saw them posting their biggest single day gains in 16 years. Investors are reacting to government unveiling a series of bold stimulus measures to tackle several economic challenges, including an ailing labor market, a housing crisis, and weak consumer demand. My next guest describes these latest efforts as unprecedented. Haining Zha is Vice President and Director of Asset Allocation at TD Asset Management, and he joins me now. Thank you so much for coming in.
* Thanks for having me.
* It's been extraordinary, what has happened in the market. And I know another commentator I was listening to talked about the entire Chinese recession erased in five days in the market.
* That's exactly what happened. It is highly unusual. But if you think about why they are doing now, they have every reason to do it. There are some weird things going on. So if you look at the, for example, M1, in the last 20, 25 years, it has never been negative. And earlier this year, we have negative print, which has never happened before. And another data point, if you look at mortgage, it never happened before that the household is actually paying back mortgage. The mortgage loan is actually decreasing and growing at a negative rate. So these are all some of the strange things that happen that put policymakers on high alert.
* So they saw the alerts. And then, I'm taking your words here, this was a generational move in the markets that people saw. So it was impressive. Can you just talk a bit about how they responded to those alerts that they saw? What did the government do?
* So before they are doing baby steps in the face of a death spiral. So as you can see, it is not enough. Some of these data points, they continue to deteriorate to the point that they have to react. And if you are looking forward, in November, we will have a US election. What if Trump got elected? There could be another source of external shock. When that happened, the death spiral is actually going to be even worse. So I think they are doing this at the right moment.
* So monetary policy, housing market, capital markets, what did they do?
* So let's go through one by one. So in terms of monetary policy, there are a lot more that they did this time around. First of all, number one on the reserve requirement ratio cut, they cut by 50 basis points. This is kind of expected, because there is ample liquidity within the Chinese economy. The problem is the household and the private enterprise, they don't want to use that liquidity either for doing business or for investing, because it's a very bleak picture out there.
* The second component is they cut reverse repo by 20 basis points. So if you look at this 20 basis points, in the last few policy changes, they are cutting by 10 basis points. So this is actually more than what they did before.
* And the third component, if we're moving down the yield curve, looking at one year medium term lending facility, they cut by 30 basis points. Again, it's higher than what they did before. Before they were only doing 10, 20 basis points. And most importantly, this time around they make the monetary stimulus open ended. So the central bank governor makes it very clear that in the upcoming quarters, months or quarters, there will be more. So very rarely you see central bank governor proactively communicate the policy like that. It's a little bit like forward guidance used by the Fed.
* Interesting. So it's not just what they did, which was significant, but it was more to say there is more to come, or that you should be expecting more to come.
* Yeah.
* Maybe just take us through about what you think that more to come could be. And again, if you had a crystal ball, I'm sure you would be able to tell us everything. But what are the kinds of things you could see happen at this point?
Right. So on the monetary policy front, they can further cut triple R rate, Reserve Requirement Rate, and also all kinds of interest rate, including the loan prime rate, which directly linked to the corporate lending rate and mortgage rate. So this actually related to the second component, the housing market. One of the biggest things they did is to lower the mortgage rate on the existing mortgage by 50 basis points. So this will result in immediate saving of 150 billion RMB for the consumer and households.
* And given the interest rate cut in the reverse repo in the upcoming months, this loan prime rate will also be cut another 25 basis points. And the loan prime rate-- these mortgages are set on an annual basis, and most of the reset will happen earlier next year. So if you count for how much the loan prime rate has already gone down plus this additional 50 basis points cut, we are talking about roughly 1 trillion consumer savings, which roughly equals 1% of GDP.
* Wow. And so that's money going into consumers' pockets today that they didn't have before. And then hopefully get them stimulating the domestic side of the economy. I didn't let you get to them all. So in capital markets then, too, is there more you're expecting to happen on that front as well?
* Exactly. That's actually the most innovative part. So they created something that we have never seen before. The first one is $500 billion liquidity facility for non-bank financial institutions, for example, mutual funds, insurance companies, broker dealers. The sole purpose of the money, you can only use it to buy equity, which never happened before. So you can almost think of it as a quasi-QE. So I think for any investor investing in developed market, when you hear the word QE, you should be on high alert, because QE means more return for the investors in the long run.
* The second facility they created is a corporate buyback facility. So right now, in the US, the US government actually put on a 1% tax on a corporate buyback. But in China, after they put out this new facility, they are lending you money at 2.25% for you to buy back corporate shares. So just imagine if a company, its dividend yield is 4% or 5%-- which there are plenty in the Chinese equity space because the stock price has gone down by so much-- but they keep their dividend, then that 2.25% borrowing rate versus that 4% or 5% dividend rate means that as an investor, if you buy back, you can immediately gather that roughly 2% yield spread.
* It's extraordinary in terms of how much and how targeted some of these are as well, too, some to the consumer, some to the capital markets to keep things going. I'm going to ask you, is this time for investors to start focusing on China again, or did we miss it? Was that the big move, do you think, or how should people think about this?
* This kind of very violent rally is kind of unfriendly to most of the investors, because investors are still stuck in a bearish sentiment or bearish mood. Then all of a sudden come with this step change, it is very hard for investors to all of a sudden change their investment attitude. So very few of them actually benefit from this rally. But if you missed out on last week, you are already missing out roughly 25% of return.
* Wow.
* But to be fair, even after 25% rally, the Chinese equity valuation is still relatively low. The [? 4P ?] is trading at roughly 13 times. So it's not expensive at all. And in the near future, there could be more policy stimulus coming.
[MUSIC PLAYING]
* Chinese stocks have been surging in recent days, including a session earlier this week that saw them posting their biggest single day gains in 16 years. Investors are reacting to government unveiling a series of bold stimulus measures to tackle several economic challenges, including an ailing labor market, a housing crisis, and weak consumer demand. My next guest describes these latest efforts as unprecedented. Haining Zha is Vice President and Director of Asset Allocation at TD Asset Management, and he joins me now. Thank you so much for coming in.
* Thanks for having me.
* It's been extraordinary, what has happened in the market. And I know another commentator I was listening to talked about the entire Chinese recession erased in five days in the market.
* That's exactly what happened. It is highly unusual. But if you think about why they are doing now, they have every reason to do it. There are some weird things going on. So if you look at the, for example, M1, in the last 20, 25 years, it has never been negative. And earlier this year, we have negative print, which has never happened before. And another data point, if you look at mortgage, it never happened before that the household is actually paying back mortgage. The mortgage loan is actually decreasing and growing at a negative rate. So these are all some of the strange things that happen that put policymakers on high alert.
* So they saw the alerts. And then, I'm taking your words here, this was a generational move in the markets that people saw. So it was impressive. Can you just talk a bit about how they responded to those alerts that they saw? What did the government do?
* So before they are doing baby steps in the face of a death spiral. So as you can see, it is not enough. Some of these data points, they continue to deteriorate to the point that they have to react. And if you are looking forward, in November, we will have a US election. What if Trump got elected? There could be another source of external shock. When that happened, the death spiral is actually going to be even worse. So I think they are doing this at the right moment.
* So monetary policy, housing market, capital markets, what did they do?
* So let's go through one by one. So in terms of monetary policy, there are a lot more that they did this time around. First of all, number one on the reserve requirement ratio cut, they cut by 50 basis points. This is kind of expected, because there is ample liquidity within the Chinese economy. The problem is the household and the private enterprise, they don't want to use that liquidity either for doing business or for investing, because it's a very bleak picture out there.
* The second component is they cut reverse repo by 20 basis points. So if you look at this 20 basis points, in the last few policy changes, they are cutting by 10 basis points. So this is actually more than what they did before.
* And the third component, if we're moving down the yield curve, looking at one year medium term lending facility, they cut by 30 basis points. Again, it's higher than what they did before. Before they were only doing 10, 20 basis points. And most importantly, this time around they make the monetary stimulus open ended. So the central bank governor makes it very clear that in the upcoming quarters, months or quarters, there will be more. So very rarely you see central bank governor proactively communicate the policy like that. It's a little bit like forward guidance used by the Fed.
* Interesting. So it's not just what they did, which was significant, but it was more to say there is more to come, or that you should be expecting more to come.
* Yeah.
* Maybe just take us through about what you think that more to come could be. And again, if you had a crystal ball, I'm sure you would be able to tell us everything. But what are the kinds of things you could see happen at this point?
Right. So on the monetary policy front, they can further cut triple R rate, Reserve Requirement Rate, and also all kinds of interest rate, including the loan prime rate, which directly linked to the corporate lending rate and mortgage rate. So this actually related to the second component, the housing market. One of the biggest things they did is to lower the mortgage rate on the existing mortgage by 50 basis points. So this will result in immediate saving of 150 billion RMB for the consumer and households.
* And given the interest rate cut in the reverse repo in the upcoming months, this loan prime rate will also be cut another 25 basis points. And the loan prime rate-- these mortgages are set on an annual basis, and most of the reset will happen earlier next year. So if you count for how much the loan prime rate has already gone down plus this additional 50 basis points cut, we are talking about roughly 1 trillion consumer savings, which roughly equals 1% of GDP.
* Wow. And so that's money going into consumers' pockets today that they didn't have before. And then hopefully get them stimulating the domestic side of the economy. I didn't let you get to them all. So in capital markets then, too, is there more you're expecting to happen on that front as well?
* Exactly. That's actually the most innovative part. So they created something that we have never seen before. The first one is $500 billion liquidity facility for non-bank financial institutions, for example, mutual funds, insurance companies, broker dealers. The sole purpose of the money, you can only use it to buy equity, which never happened before. So you can almost think of it as a quasi-QE. So I think for any investor investing in developed market, when you hear the word QE, you should be on high alert, because QE means more return for the investors in the long run.
* The second facility they created is a corporate buyback facility. So right now, in the US, the US government actually put on a 1% tax on a corporate buyback. But in China, after they put out this new facility, they are lending you money at 2.25% for you to buy back corporate shares. So just imagine if a company, its dividend yield is 4% or 5%-- which there are plenty in the Chinese equity space because the stock price has gone down by so much-- but they keep their dividend, then that 2.25% borrowing rate versus that 4% or 5% dividend rate means that as an investor, if you buy back, you can immediately gather that roughly 2% yield spread.
* It's extraordinary in terms of how much and how targeted some of these are as well, too, some to the consumer, some to the capital markets to keep things going. I'm going to ask you, is this time for investors to start focusing on China again, or did we miss it? Was that the big move, do you think, or how should people think about this?
* This kind of very violent rally is kind of unfriendly to most of the investors, because investors are still stuck in a bearish sentiment or bearish mood. Then all of a sudden come with this step change, it is very hard for investors to all of a sudden change their investment attitude. So very few of them actually benefit from this rally. But if you missed out on last week, you are already missing out roughly 25% of return.
* Wow.
* But to be fair, even after 25% rally, the Chinese equity valuation is still relatively low. The [? 4P ?] is trading at roughly 13 times. So it's not expensive at all. And in the near future, there could be more policy stimulus coming.
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