Look out, the Bazooka was in fact a M202 Rocket Laucnher

4 shots are better than one

Alright, comrades. This is just a short note where I want to re-iterate one more time - China has decided to stimulate its way out of their predicament they are in. This decision was taken at the 3^rd plenum, and we are just seeing the implementation waves.

Take the politburo meeting today. Chaired by Xi himself it was the first September meeting on my memory that dealt with the economy. Unsurprising perhaps given the situation, still quite unusual. It does make sense though, as policies that are expected to be implemented after “Golden Week” needed to have been formulated and announced this week at the latest, so it makes sense in that regard.

Several key policy measures were outlined in the readout:

1. Macroeconomic regulation: Strengthen counter-cyclical adjustments in fiscal and monetary policies, including reducing the reserve requirement ratio and implementing interest rate cuts.

2. Real estate market: Stabilize the property market, adjust home purchase restrictions, and lower interest rates on existing mortgages.

3. Capital market: Boost the capital market by guiding long-term funds to enter the market and support mergers and acquisitions of listed companies.

4. Business support: Help enterprises overcome difficulties and introduce laws to promote private economy development.

5. Consumption promotion: Increase income for low and middle-income groups and foster new consumption patterns.

6. Livelihood protection: Focus on employment, especially for key groups like college graduates and migrant workers, and strengthen assistance for low-income populations.

7. Food security: Ensure national food security by focusing on agricultural production.

I note that long time readers will note that yes livelihood quality has in fact been shorthand for quality-of-life improvement including employment and income. But really none of this should be a surprise. But just for good measure, lets revisit The Gameplan:

• Boost income for the lower and the middle class

• Prop up consumption

• Use the Central govt Balance Sheet to clean up Local Govt funding issues

• Slash interest rates like they're going out of style to help with all of that

Here's the thing, though. Economics and markets aren't just about numbers. It's about psychology. It's about confidence. And confidence, is as elusive as a straight answer from a politician. Is there a surefire way to create confidence? About as likely as finding a unicorn in Tiananmen Square. But that doesn't mean China isn't trying. The message that came out of the third plenum and is being repeated now is crystal clear: "We see the problems, and we're on it." And you know what? They're putting their money where their mouth is. Somewhat literally.

Now, I can already hear the naysayers: "It's not enough!" "It won't work!" To which I say, they literally told you that there is more from where this came from. I would pay particular attention to the fact that this time around there is a lot more coordination in the effort. This coordinated response is crucial. Its monetary and fiscal and regulatory and pro-market all at once.  It's not just about throwing money at the problem; it's about sending a unified message. Not only did we get the monetary loosening, but now the fiscal stimulus both with promises of more. On top of that we have Companies being incentivized to buy their own shares back and being able to get loans for that. The financial authorities are finally singing from the same hymn sheet. It's like watching a ballet, except instead of tutus, we've got bureaucrats in suits.

All of that screams “Whatever it takes”! To me this was obvious on Tuesday, but to the “pushing on rope” crew it should become more apparent now.  I'm not saying this is going to be a smooth ride. China's economy is like a massive ship - it takes time to turn. But at least now, it looks like all hands are on deck, steering in the same direction. Will it work? I think so, but we remain data dependent of course. And structural reforms remain a priority but those are also in the works.

I have been lucky enough to be at the GaveKal London conference earlier this week where most of the possible scenarios were discussed. Loius-Vincent has made a phenomenal point that I hope he will not be too upset with my sharing. The best indicator of the change in the regime is the fact that after the rate cuts in China the RMB has in fact traded up.

Consider the implication of an RMB that no longer depreciating. This is obviously a pro-labour, pro-households shift. Weaker currency helps exporters, stronger currency helps importers – largely households. And for those large overseas cash balances of over US$4trn that we attribute to Chinese corporates not repatriating large chunks of export profits. As yields fall in USD, and USD is declining against RMB, this makes the cost of nto repatriating and investing RMB domestically that much higher, and at some point too high.

On top of that we add the previously mentioned buyouts. This all of a sudden creates a market ready to go up, even if it was overvalued before. But in China’s case not only has it not been overvalued, but its been sold down and de-rated in waves, most recently in August/September.

So I would like to re-iterate my view on China. Not only are we getting structural changes that are beneficial to both the country as a while and the financial market, but we have a revaluation back to the mean that can be achieved quite quickly as soon as the market realises that things aren’t getting worse, and instead have turned up.

I leave you with the fact that there is one guy who really does get it. David Tepper of the Appaloosa Capital management (and to some - Carolina Panther ownership fame ). His CNBC interview snippets are on point.

https://x.com/squawkcnbc/status/1839284348622680105?s=46