The Perfect Example Of “Slowly & Then All At Once”
You Can't Spell Credit Event Without The C In China
If there’s going to be a catalyst for a major global credit event, it’s looking more and more like it will be China. The rest of the world, of course, has its potential triggers. The housing market, as indicated by lower lumber prices and rising mortgage rates, is still setting up for a major decline. The Eurozone is managing to avoid recession, but barely, and core inflation rates in the region are still near cycle highs (the U.K. is still at 7%). Japan might finally be growing again, but so is inflation and the Bank of Japan could be getting ready to tighten the screws. As I’ve noted before, that could spill over into the U.S. equity markets if it triggers a big yen rally.
China, however, looks like the biggest risk of all. This goes way beyond the latest economic data, which isn’t encouraging in and of itself (retail sales, industrial activity and fixed investment all came in below expectations in July). I’m talking about major structural issues that have the potential to collapse entire sectors of the country’s economy. These events have been building for months now and they’re starting to point towards an extensive and possibly widespread liquidity crisis. If that sounds like a fancy way of saying “credit event”, it should. It’s exactly the type of catalyst that could usher in a broad flight to safety trade and the latest downturn in the current bear market.
Developments are happening at a furious pace, so I want to review where China stands right now and how it risks setting off a global firestorm.
A Surprise Rate Cut From The PBoC
When it comes to rate policy, the PBoC is known for taking baby steps. Their adjustments usually come in 5 basis point increments here and there. Market watchers weren’t expecting any change at this week’s monthly meeting, but instead got a 15 basis point cut on the 1-year medium-term lending facility rate. It’s the 2nd rate by the central bank since June and the largest single move since 2020.
The markets are waiting for the big government stimulus package, but so far there’s little indication that something like that is imminent. This is a sign, however, that the Chinese government realizes that the country’s economy is in trouble and more stimulus measures are likely on the way. The next one is probably going to be a cut in the loan prime rate on Monday next week, which is looking like it will also be 15 basis points.
15 basis points doesn’t sound like much, but it’s relatively equivalent to a 75 basis point cut by the Fed. In other words, it’s significant by PBoC standards.
Real Estate Sector Debt Implosion
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