CHINAMacroReporter

'Big lessons from the faulty analysis that spiked the Shanghai stock market'

'What everyone got wrong about the Politburo meeting'

ProTips from Andrew Polk, Trivium China On April 24, equity analysts interpreted a phrase used in a Politburo meeting readout to signal a new round of economic stimulus. And, the Shanghai stock market, one of the world's worst performers, spiked 2%. On April 25, having much earlier advised and protected clients, Andrew Polk of Trivium China published an analysis in Trivium's daily (and free) Later, Andrew and I talked about how he reached his conclusions. His explanation is a masterclass in how experience, discipline, and some tedious slogging, combined with a sound analytical framework, lead to good China analysis.
by

|

CHINADebate

April 30, 2018
'Big lessons from the faulty analysis that spiked the Shanghai stock market'

1. The Politiburo speaks, the market spikes

Image
‍source: CNBC 

Investors, traders, and analysts scrutinize every comment made by the U.S. Federal Reserve. And, how they interpret these comments moves markets. Sometimes up, sometimes down, sometimes both in the same day. 

In China, where policy and economics are even more tightly intertwined, readouts from Politburo meetings are even more carefully parsed for clues that indicate changes in how the economy is going to be managed. And, how these are parsed likewise moves markets.

 Over time, phrases in Politburo readouts become associated with specific policy changes. So, when you see a certain phrase, you interpret this as a signal. Unless...

  • The phrase has lost its connotation or taken on a new one, or
  • The phrase is mechanically pulled out from a context that strips the expected connotation from the phrase.
  • Either way, you get what the Politburo meant wrong.

Andrew Polk of Trivium China: 'The Politburo - China’s 25 highest-ranking politicians -  held its monthly meeting on April 23 and discussed Q1 economic performance and the policy outlook.'

  • from the meeting came out, the markets got really excited because the readout included the phrase, "We need to expand domestic demand."'
  • 'Under the Hu-Wen administration that phrase used to be a very clear signal of coming stimulative measures for economic activity.'
  • on that and said, "Oh, it looks like the Chinese top leaders are going back to the stimulus playbook of the Hu-Wen era and are looking to expand domestic demand again."'
  • 'And, the Shanghai composite jolted in reaction – up 2% on Tuesday, April 24, the biggest one-day jump so far in 2018.'

The excitement. An example from Bloomberg, April 24: 'China Stocks Get Adrenaline Shot From Policy Easing Signals.'

  • got a much-needed shot in the arm Tuesday, gaining the most in two months amid signs the government is willing to ease its tightening campaign to avoid an overly sharp economic slowdown.'
  • followed a meeting where policy makers mentioned the need to boost domestic demand for the first time since 2015, and dropped a reference to deleveraging.'
  • meeting sends a signal that China may roll out fiscal stimulus and supportive monetary policies to resolve financial risk and stabilize markets,” said Ken Chen, a Shanghai-based analyst with KGI Securities Co. “That has boosted sentiment on the market, especially for blue chips.”'
  • Mr. Chen's analysis was echoed by many other equity analysts.

The problem. Mr. Chen and the other analysts were wrong about what the Politburo meant. Andrew explains.

2. How to parse Politburo pronouncements

Image
‍source: South China Morning Post     

Andrew: '"We need to expand domestic demand" has been a buzzword or buzzphrase, if you like, in China signaling stimulus is coming.'

  • in the Politburo meeting readout and said, "That's what they used to mean when they said this, and so it must mean that again."
  • 'They didn't realize the nature of that phrase has changed over the past five or six years.'
  • 'The analysts should have done a more careful reading.'

'Careful reading.' How do you do a careful reading? Andrew and Trivium China show you three steps:

  1. Trace the 'etymology' of the phrase.
  2. Check the context where the phrase is used.
  3. Consider what makes sense. 

1. Trace the 'etymology' of the phrase 

  • and read through all the Politburo readouts from the economic meetings, which take place generally in April and December, and it was pretty clear by reading those how that phrase had evolved over the past few years.'  that the last couple of times that they just used the term "domestic demand," or even "increasing domestic demand," it wasn't followed soon by stimulus.'
  • the PBoC embarked on an easing cycle that included six cuts to benchmark interest rates over the course of 12 months, for a total reduction of 165 basis points in the key lending rate –and the Politburo never once talked about “increasing domestic demand” during that period.'
  • of how the phrase has been used, we could see that it hasn't really meant stimulus since Xi Jinping has taken power. So there's no real reason to read that new phrasing as stimulative.'

2. Check the context where the phrase is used

'So, despite the initial stock market reaction, the Politburo statement is much less than meets the eye for several reasons':

  • from the readout was to underscore the “three tough battles” as policy priorities in 2018 – i.e. addressing financial risks, fighting pollution, and alleviating poverty. So risk containment is still top dog.'
  • “expanding domestic demand” comes at the end of a long sentence listing a host of priorities, which also included keeping fiscal policy “constant” and monetary policy “neutral.”'
  • hasn’t used the term “domestic demand” for several years, it has often identified the need to “expand aggregate demand.” They used that phrase four different times in 2016, and once in 2017. Those mentions were not followed by stimulus.'
  • of “aggregate demand” with “domestic demand” is all about the looming trade war. Policymakers are rightly concerned that trade tensions may have a major effect on growth. If that is the case, they will try to offset those negative effects.'

'When we saw how the phrase was used in the context of the entire Politburo readout, it was pretty clear that they didn't have stimulus in mind.'

3. Consider what reading makes sense to support the economy in the face of a potential trade war is a far cry from pump-priming credit and investment to stave off an organic economic slowdown.'
of the Politburo statement together, then, it is pretty clear that Xi Jinping was saying “we will support growth in response to a trade war if we have to, but we are mostly still focused on risk containment.”'- see that the economy is broadly slowing, but so far they are still comfortable with the current growth range, especially on the nominal side.'

if the Politburo did mean, "We're going to do some stimulus activity," it's unclear to me where exactly that stimulative activity would come from.'

'When analysts were saying, "This is a signal that macro policy is loosening," I ask them, "What would the stimulus look like right now?"'

  • 'China is pretty much maxed out on the fiscal side.'
  • at just 1.5% – already a negative real yield thanks to inflation at 2.1% – the PBoC does not have room to cut on the monetary front.'
  • 'Moreover, they're trying to contain the big markets in real estate right now, so there's really is no room to cut interest rates.'
  • are currently elevated, and there's a tightening cycle in the US, so a marked acceleration in credit growth just doesn’t seem feasible.'
  • with the financial derisking that's going on - and financial derisking was clearly underlined in the Politburo readout - they can't really boost bank lending at the same time that they're trying to get banks to reduce interbank activity and keep bank funding tight.' 

had stepped back to consider what makes sense, they would have seen that China doesn't have any good options to stimulate the economy now, even if it wanted to.' 

The bottom line

'The bottom line: There is no stimulus coming.'

  • The analysts and then the market got it wrong.
  • Why? 'I think it was a bit of a lazy reading of "We need to expand domestic demand."'

And, how.    

3. 'The art of China-watching': 

then & now

Image

the kind of careful analysis needed to approach a correct interpretation of Chinese official pronouncements. But, at least today there are official pronouncements. 

in China Operations - that is, a spy not an analyst - I'd see my colleagues in the Soviet/East European Division pulling their hair out trying to figure out what a photo meant.

  • Not a picture of a Red Army missile site - a picture of the old guys standing on the rostrum at the May Day Parade.
  • What their order in line meant, who was in, who was out, and so on.
  • That's one of the ways they tried to get a handle on what was happening in the closed, authoritarian Soviet Union.
  • In the trade (and later commonly), we called it 'Kremlinology.'
  • China, for 'China watchers,' was just as opaque. Maybe even more so. We didn't have as many revealing photos and speeches.

Here's a quote from the CIA's now declassified, 'The Art of China Watching,' written in the mid-1970's, not long before I joined China Operations.

  • that observers of the Chinese political scene are more often called "China-watchers" than "Sinologists," while analysts of the Soviet Union are frequently referred to as "Kremlinologists."'
  • 'The art of China-watching is imprecise at best, and hardly deserves yet to be called Sinology.' 
  • for this often frustrating situation lies mainly with the way the Chinese conduct their affairs. To say the Chinese have a penchant for secrecy is almost an understatement.'

While much has changed in China since then, the 'penchant for secrecy' hasn't. And, 'the art of China watching' is still 'imprecise at best.'

As Andrew has shown, 'China watchers' today, especially in the form of equity analysts, look at words not pictures. 

  • What does a phrase used in an official pronouncement signal?
  • How was it used in the past, and when it was, what happened?
  • Has the phrase taken on a new meaning, and therefore has become a signal of some new outcome?

in this way is just as challenging - and imprecise - as analyzing a photo. And, when analysts get it wrong, markets move just as much as when they get it right.

More

CHINAMacroReporter

February 7, 2021
'Remarks by President Biden on America's Place in the World'
“We’ll confront China’s economic abuses; counter its aggressive, coercive action; to push back on China’s attack on human rights, intellectual property, and global governance.”“But we are ready to work with Beijing when it’s in America’s interest to do so. We will compete from a position of strength by building back better at home, working with our allies and partners, renewing our role in international institutions, and reclaiming our credibility and moral authority, much of which has been lost.”“That’s why we’ve moved quickly to begin restoring American engagement internationally and earn back our leadership position, to catalyze global action on shared challenges.”
keep reading
February 7, 2021
'In Search of Today’s George Kennan'
‘Kennan provided a framework to break through the bitter divide between those who believed America should return to its prewar isolationism, and those who believed the USSR was itching for a dramatic showdown with the capitalist west.’
keep reading
February 7, 2021
' "Longer Telegram" Sets Off Fierce Global Debate'
'The fierce global debate set off this week by a thought-provoking paper - “TheLonger Telegram: Toward a New American China Strategy” – has underscored the urgency and difficulty of framing a durable and actionable U.S. approach to China as the country grows more authoritarian, more self-confident and more globally assertive.'
keep reading
May 27, 2021
'Demography + Technology is Destiny'
The census showed that the number of births nationwide fell to the lowest level since 1961, following a nationwide, manmade, famine caused by Mao’s “Great Leap Forward” that killed tens of millions of people, and that China’s total population could peak in the next few years.
keep reading
May 27, 2021
'China: Births Falling'
‘China’s total population could peak in the next few years, spurring profound changes for the world’s second-biggest economy.’
keep reading
May 27, 2021
'Demography + Technology is Destiny'
The census showed that the number of births nationwide fell to the lowest level since 1961, following a nationwide, manmade, famine caused by Mao’s “Great Leap Forward” that killed tens of millions of people, and that China’s total population could peak in the next few years.
keep reading
May 27, 2021
'China: Getting Old Before Getting Rich'
‘Over the past two generations, China has seen a collapse in fertility, exacerbated by Beijing’s ruthless population-control programs.’ ‘With decades of extremely low fertility in its immediate past, decades more of that to come, and no likelihood of mass immigration, China will see its population peak by 2027.’
keep reading
May 27, 2021
'China Bets on Productivity Over Population to Drive Its Economy'
‘Beijing has a two-pronged approach to maintaining economic growth as its population shrinks.’ ‘First, it intends to slow the decline of the urban workforce by raising the retirement age and encouraging migration of more of the country’s 510 million rural residents to cities.’ ‘Second, it plans to raise productivity -- a measure of economic output per worker -- with the latest five-year plan emphasizing better vocational education and more investment in scientific research, automation and digital infrastructure.’ [see second chart above]
keep reading
May 27, 2021
'China: Getting Old Before Getting Rich'
‘Over the past two generations, China has seen a collapse in fertility, exacerbated by Beijing’s ruthless population-control programs.’ ‘With decades of extremely low fertility in its immediate past, decades more of that to come, and no likelihood of mass immigration, China will see its population peak by 2027.’
keep reading
May 27, 2021
'China: Births Falling'
‘China’s total population could peak in the next few years, spurring profound changes for the world’s second-biggest economy.’
keep reading
May 27, 2021
'Why Demographics is (Close to) Destiny'
‘Demographics may not be destiny, but for students of geopolitics, they come close.’
keep reading
May 27, 2021
'Sex and the Chinese Economy'
‘A rise in China’s male-female ratio may have contributed to between one-third and one-half of the increase in its trade surplus with other countries.’ ‘The sex imbalance thus likely underpins an important source of tension between China and the US. Yet bilateral engagement has paid scant attention to this linkage.’
keep reading
May 27, 2021
'Lousy demographics will not stop China’s rise'
‘The old maxim ‘demography is destiny’ no longer holds in the same way that it used to.’ ‘A shrinking and ageing population may not have the same gloomy implications in the 21st century.’
keep reading
May 20, 2021
'Apple in China: No Plan B'
“This business model only really fits and works in China. But then you’re married to China.” ‘The Chinese government was starting to pass laws that gave the country greater leverage over Apple, and Mr. Xi would soon start seeking concessions. Apple had no Plan B.’
keep reading
May 20, 2021
'Tim Cook and Apple Bet Everything on China.'
‘For Apple, a clean break with China is impossible.’
keep reading
May 20, 2021
'Apple held hostage by its Chinese puzzle'
"The massive and complete supply chain ecosystem in China is key to the iPhone maker's success, but it has also created a gigantic organism that would struggle to move somewhere else."
keep reading
May 20, 2021
‘Censorship, Surveillance and Profits: A Hard Bargain for Apple in China’
‘Apple built the world’s most valuable business on top of China. Now it has to answer to the Chinese government.’
keep reading
May 20, 2021
Apple in China
‘But just as Mr. Cook figured out how to make China work for Apple, China is making Apple work for the Chinese government.’ ‘Behind the scenes, Apple has constructed a bureaucracy that has become a powerful tool in China’s vast censorship operation.’
keep reading
May 20, 2021
'Apple Reaches $2 Trillion'
“This business model only really fits and works in China. But then you’re married to China.” ‘The Chinese government was starting to pass laws that gave the country greater leverage over Apple, and Mr. Xi would soon start seeking concessions. Apple had no Plan B.’
keep reading
May 15, 2021
‘Scenario Three: Leadership Challenge or Coup
‘By removing de jure term limits on the office of the presidency — and thus far refusing to nominate his successor for this and his other leadership positions — Xi has solidified his own authority at the expense of the most important political reform of the last four decades: the regular and peaceful transfer of power.’
keep reading
May 15, 2021
Invitation to a Trivium Flash Talk: 'China's Data Environment from a Big-Picture Perspective.’
‘This talk is designed to cut through the tech and legal jargon, and lay out the top-level strategic rationale underpinning China's thinking on data. We'll cover:’
keep reading
May 15, 2021
Invitation to a Trivium Flash Talk: 'China's Data Environment from a Big-Picture Perspective.’
‘This talk is designed to cut through the tech and legal jargon, and lay out the top-level strategic rationale underpinning China's thinking on data. We'll cover:’
keep reading
May 15, 2021
After Xi: A Succession Crisis to Rock the World
A new risk to add to your analyses and strategic planning: A succession crisis in China. By removing term limits on his stay in office and by not naming a successor, Secretary General Xi Jinping ‘has pushed China towards a potential destabilising succession crisis, one with profound implications for the international order and global commerce,’ writes Richard McGregor of the Lowy Institute and Jude Blanchette of the Center for Strategic & International Studies
keep reading
May 15, 2021
‘Scenario Four: Unexpected Death or Incapacitation'
‘Even if the CCP’s claim that Xi Jinping has no designs to remain in office for life is true, his evisceration of succession norms leaves the country ill-prepared for his sudden death or incapacitation.’
keep reading
May 15, 2021
'Regime change in China is not only possible, it is imperative.'
‘We must make regime change in China the highest goal of our strategy towards that country.’ ‘The US and its allies cannot dictate to China the political system by which it is governed. But they can and must engineer conditions which embolden and enable those in China who also want regime change to achieve it.’
keep reading
May 15, 2021
After Xi: A Succession Crisis to Rock the World
A new risk to add to your analyses and strategic planning: A succession crisis in China. By removing term limits on his stay in office and by not naming a successor, Secretary General Xi Jinping ‘has pushed China towards a potential destabilising succession crisis, one with profound implications for the international order and global commerce,’ writes Richard McGregor of the Lowy Institute and Jude Blanchette of the Center for Strategic & International Studies
keep reading
May 15, 2021
'Regime change in China is not only possible, it is imperative.'
‘We must make regime change in China the highest goal of our strategy towards that country.’ ‘The US and its allies cannot dictate to China the political system by which it is governed. But they can and must engineer conditions which embolden and enable those in China who also want regime change to achieve it.’
keep reading
May 15, 2021
'After Xi: China's potentially destabilising succession crisis'
‘By removing de jure term limits on the office of the presidency — and thus far refusing to nominate his successor for this and his other leadership positions — Xi has solidified his own authority at the expense of the most important political reform of the last four decades: the regular and peaceful transfer of power.’ ‘In doing so, he has pushed China towards a potential destabilising succession crisis, one with profound implications for the international order and global commerce.’
keep reading
May 15, 2021
‘Scenario One & Two: Xi Steps Down'
‘In this scenario, Xi thwarts the current consensus by handing over his leadership positions to at least one individual from the current Politburo Standing Committee (as per existing regulations).’
keep reading
May 12, 2021
The Poem that Cost Billions
The billion dollar losses that came from quoting an 1,100-year-old poem, toWhy foreign companies in China have Stockholm Syndrome
keep reading
May 10, 2021
'A 1,100-Year-Old Poem Cost Meituan’s Outspoken CEO US $2.5 Billions'
‘On Monday, because of an 1,100-year old poem about events 2,200 years ago posted by the founder of food delivery giant Meituan, investors panicked, and sank the company’s market cap by $15.6 billion. And Meituan CEO Wang Xing, who posted the poem, lost $2.5 billion of his wealth.’
keep reading
May 9, 2021
'The Housing Bubble That Just Won’t Pop'
‘China’s cities are plagued by a diverging trend: high demand and exorbitant prices for residential properties in tier 1 cities and yet an oversupply in smaller, lower-tiered cities.’
keep reading
May 7, 2021
'Would China really invade Taiwan?'
‘Is Taiwan really "the most dangerous place on earth?" No. Or at least, not right now.’
keep reading
May 7, 2021
'Don't Help China By Hyping Risk Of War Over Taiwan'
‘China is marshaling its full range of capabilities to intensify pressure on Taiwan below the threshold of conflict.’ ‘Beijing's goal is to constantly remind Taiwan's people of its growing power, induce pessimism about Taiwan's future, deepen splits within the island's political system and show that outside powers are impotent to counter its flexes.' ‘Its approach is guided by the Chinese aphorism, "Once ripe, the melon will drop from its stem [瓜熟蒂落]," ’‘This strategy may require more time than war, but it would come at less cost and risk to Beijing.’
keep reading
May 7, 2021
'China Threat: A "perception gap" between the U.S. and Taiwan'
‘While the U.S. talks up the medium-term military threat, the democratic island sees the moves as part of a bigger, more immediate problem: "gray zone" warfare from Beijing that is meant to wear down the morale of not just the Taiwanese military, but also the island's people.’
keep reading
May 7, 2021
'The most dangerous place on Earth'
‘Taiwan is an arena for the rivalry between China and America.’ ‘Although the United States is not treaty-bound to defend Taiwan, a Chinese assault would be a test of America’s military might and its diplomatic and political resolve.’
keep reading
May 7, 2021
'The Most Dangerous Place on Earth'
‘China's top priority now and in the foreseeable future is to deter Taiwan independence rather than compel unification,’ note Richard Bush (Brookings (retired)), Bonnie Glaser (German Marshall Fund in America), and Ryan Hass (Brookings Institution)
keep reading

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.