FAST FIVE: China's Looming Liquidity Shortage (Or Why Endless Stimulus Isn't Working)
Chinese Premier Li promised yet more stimulus measures overnight from tax cuts to focused rate reductions (but, he admitted, not blanket liquidity provision).
Local government officials who typically implement infrastructure spending and other forms of stimulus are facing conflicting pressures.
The emphasis in recent years on reducing off-balance-sheet borrowing, selecting only higher-value projects, and eliminating corruption has made local officials more cautious.
Chinese easing- / stimulus- escalation being a likely requirement for any sort of “reflation” theme to work beyond a tactical trade: yes, more RRR cuts are coming eventually (a better way for Chinese banks to obtain liquidity vs borrowing from MLF or TMLF, bc it's cheaper and more stable).
…but that the timing of such a cut is primarily dependent on the Chinese stock market, as the “re-bubbling” happening real-time in Chinese Equities (CSI 300 +26.8% YTD; SHCOMP +24.4%; SZCOMP +34.0%) likely then constrains the room and pace of Beijing's policy easing / stimulus This “Chinese Equities rally effectively holding further RRR cuts hostage” then could become a serious “fly in the ointment” for near-term / tactical “reflation” (or bear-steepening) themes, as Q2 is on-pace to see a significant liquidity shortage.