Winter is Coming to China, Tax Cuts and Infrastructure or Bust

iFeng: 预警!美元寒冬逼近,中国楼市悬了

China can't ease monetary policy.
According to the analysis of the previous two sections, if the Chinese currency chooses to relax at the moment, the Chinese government bond yield curve will shift downwards, and then the spreads between China and the United States will be further squeezed, which means that the renminbi will be subjected to tremendous devaluation pressure.
China can't devalued the renminbi though, since it will exacerbate trade tensions:
On the one hand, Trump will not allow China to resolve the dilemma of declining external demand through the devaluation of the renminbi, which is inconsistent with the United States’ stance of launching a trade war.

On the other hand, China’s efforts to enhance product competitiveness by devaluing its own currency will also hurt its trading partners outside the United States. Under the current environment of confrontation between China and the United States, it is obviously unfavorable to China.
China also can't tighten monetary policy as the trade surplus declines.
How to expand domestic demand? The total output of a country, divided according to demand, can be divided into three parts:

Investment + consumption + net exports, the first two parts are domestic demand, and the last one is foreign demand. Now that external demand is not working, it is logical to either expand consumption or expand investment, there is no other way.

Is it easy to expand consumption? Very difficult.

Taking into account the arduous efforts made by the Chinese resident sector in the past two years to “de-stock,” mortgage loans for decades have completely overdrawn most of the residents’ spending power and willingness to consume.

Therefore, only investment is left. Investment can be divided into manufacturing, infrastructure and real estate.
Manufacturing? Unlikely.
Is manufacturing investment easy to start? The same is very difficult!

Why? Because manufacturing ROE (return on investment) has been significantly squeezed out of finance and real estate, it is almost zero, or even negative. The ROE that reshapes the manufacturing industry is a relatively long process. It may be that the entire process of supply-side reform and de-leveraging is completed and that the market is only possible once it is cleared.
Real estate? Also unlikely.
The key point is that the level of residents' debts is increasing very quickly. It's scary! Resident debt ratios ranged from 20% to 50%, the United States spent 40 years, and China only spent 10 years. At this rate, within the next three to four years, the United States could reach the top of the bubble in the last round of housing bubbles by 73%.

It is also the madness of residents that increases leverage and restricts the contribution of consumption to economic growth. The growth of real estate investment is based on the overdraft of residents' consumption in the coming decades.
If the currency depreciates, the real estate market will suffer:
Especially with the United States in the cycle of rising yields, if China's currency cannot tighten to maintain spreads (in fact, it cannot), then the renminbi has a greater depreciation pressure to start real estate and may cause house locks. Without the liquidity, there is a systematic risk that the capital flight will lead to the passive rupture of the real estate bubble. This result is very damaging! This is also the fundamental reason why the exchange rate cannot be depreciated significantly.
What is left? Centrally planned infrastructure!
However, I believe that, based on the above analysis, the top management is likely to abandon this short-term goal and instead tolerate the short-term increase in the level of local government debt, in order to achieve the goal of “expanding domestic demand”. In connection with the latest Politburo meeting's description of the “Rural Revitalization” strategy and the “Out of Poverty Alleviation” program, I think it is possible and feasible to promote domestic demand through the expansion of rural infrastructure.

This kind of deduction is also in full accord with the statement made by the Politburo meeting on "adhering to a proactive fiscal policy." The implementation of a proactive fiscal policy, which is implemented in concrete terms, is most likely a result of the foundation of the infrastructure (economy) (domestic demand).

Therefore, fiscal policy points out that tax cuts and infrastructure will continue to be “positive”.
Tax cuts and infrastructure.
China will face a dilemma in the selection of any kind of policy tools. However, taking into account the circumstances that lead to the smallest possible systemic risk, only an active fiscal policy is the current way out. Specifically, it is a tax reduction and maintaining a relatively positive infrastructure.

Monetary policies may remain neutral, and they cannot be significantly loosened, nor can they be tightened. There will be a small depreciation of the exchange rate, but there is no long-term depreciation condition.

As regards tolerance of local government for increasing leverage, local government debt and bank's possible bad debts can be regarded as the opposite of the government. It is possible to temporarily relax the restrictions.
Politically, China can no longer allow the renminbi to depreciation. Yet depreciation is where the market wants to go. China boxed itself into a corner. It is now at the mercy of the markets. Positive economic shocks can bail it out. Strong growth overseas could bail out a China. A resumption of global growth to pre-2008 levels, with massive U.S. dollar credit growth and depreciating USD, can bail them out. Otherwise, the are walking a tightrope and any mistake leads to currency depreciation.

The author of this piece finishes with some investment advice based on the above:
Based on the above analysis logic, the trading strategy is self-evident.

The stock market will not have major systemic opportunities.

The reason is that the currency will not relax and the risk-free yield will not decline. Corporate earnings are also difficult to exceed expectations in the face of demand pressure. The turbulence in the box and the concept of fried items are the main theme of this year (for example, Hainan, semiconductors, etc.).

The bond market will move slowly down the high.

The reason for not making a sharp turnaround is because there is no inflation expectation in China and there is no possibility that growth will exceed expectations. However, taking into account the traction of the U.S. debt, it is possible that the Chinese government bond yields will slowly increase.

Goods are the only major assets that may have opportunities.

Logic is a foundation. From the previous year to the present, commodities represented by black lines have plunged in pessimism. I think this pessimistic expectation may be remedied with the introduction of more measures to “expand domestic demand”. In addition, inflation in the United Stat es may raise the price of bulk commodities globally.

Finally, talk about real estate alone.

Regardless of how the cannon was said, or the six purses and the seven purses, I always believed in my own logic, that is, real estate could not be restarted at present, for reasons that have been detailed before. If I was beaten later, I would accept it willingly.

In this world, there are too many things that are beyond our knowledge. We cannot calculate their probabilities. But what we can do is to limit the possibilities of infinite with limited knowledge.

If not, what is the difference between each of our actions and gambling?

PS: People shouting that the government should restart real estate, do you forget that in the midst of ZTE's battle, we feel the helplessness and incompetence? Real estate not only fails to save the country, but also buries the future of the entire nation.
Hope is the strategy now. Hope that U.S. growth and inflation picks up, boosts commodities, and more Chinese infrastructure can boost the economy there.

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