Chinese Stocks Pop After Politburo Hints at Inflation Solution

Yesterday I posted Politburo Watching All 5 Major Financial Markets. The statement from the latest meeting on April 23 said the party is watching credit, real estate, currency, bond and stock markets, something that has never happened before. They've mentioned property markets often, and focused on other markets at times, but never all five. While they didn't say credit easing was coming, the statement was interpreted as dovish because it didn't reference deleveraging.

Chinese traders took the news to be very dovish on Tuesday and they bid up Chinese stocks, sending the Shanghai Composite up 2 percent and the ChiNext up 3 percent.

Bloomberg: Xi Ready to Respond as China Rattled by Trade, Debt Risks

China’s leaders are giving their strongest signal since 2015 that growth in the world’s second-largest economy could slow -- and that they’re prepared to tweak policy if trade or financial risks threaten a sharp deceleration.

Hard work is needed to meet this year’s economic targets amid an increasingly complicated geopolitical situation, according to a statement released by state media Monday following a Politburo meeting led by President Xi Jinping. Though growth remained robust in the first quarter, forecasters still see the economy slowing this year as trade tensions with the U.S. and the campaign to clean up the financial sector remain as downside factors.

As the Politburo statement mentioned the need to boost domestic demand for the first time since 2015, and dropped a reference to deleveraging, investors are interpreting the change in tone as a signal that the government may ease off tightening measures if warranted. Stocks in Shanghai rallied the most in two months Tuesday.

For years, I warned that China had to reform its economy and currency. As credit expanded, the cost of a crisis increased. China has no excess reserves, it expanded its financial system along with reserves and then far beyond post-2008. As time passed amid a period of negative mood, the risk of an external shock such as U.S. trade retaliation increased. When that shock came, it would force China's hand. Now the end game is in sight. China is losing control of its currency and its economy. It is dependent on a falling U.S. dollar to keep the yuan stable and it is dependent on U.S. trade relations (more broadly global economic growth) to keep its deleveraging plans on track.