When will it stop?

CHINA FINANCIAL - In Brief 25 Aug 2015 by Michael Pettis

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Tuesday the PBoC lowered lending and deposit rates by 25 bps, to 4.60% and 1.75% respectively, and lowered the required reserve ratio by 50 bps. On Monday the regulators announced that Chinese pension funds would be allowed to hold up to 30% of their assets in stocks. Will these measures matter to the stock and currency markets? There was a time when government signaling was highly credible, and we may see a stronger market Wednesday morning, but without real buying power behind it, I don’t think any strength can last. Signaling is no longer enough, and even looser liquidity conditions are probably no longer enough. The Chinese stock markets need brute force to get them to rise substantially – Beijing has to get real investors to line up and buy shares in large enough amounts to overwhelm selling before speculative purchasing will return to the market. The government has already spent perhaps $200 billion or more trying to prop up the stock market, and maybe the same amount trying to prop up the currency, but the very fact of its having had to do so has increased concern among investors. This means that Beijing has already directly or indirectly booked several tens of billions of dollars in paper losses in their stock purchases, and with stocks still trading around 60 times current reported earnings, it is hard to imagine that they will easily recoup their losses. Pension funds can invest up to RMB 600 billion in shares now, but presumably they will follow the orders of the Ministry of Human Resources: “absolute safety must be guaranteed as China considers diversifying its massive pension fund investments to bolster their value.”