MNI ANALYSIS: More China Easing Seen, Stagnation Trade Crowded

By Stuart Allsopp

     SINGAPORE(MNI) - China's CSI300 equity index now yields more than 2-year

swaps following Friday's announcement of an RRR cut, marking only the second

occurrence since the 2008 crisis and suggesting the China stagnation trade may

be coming to an end. Such periods have been fleeting in the past, lasting only

briefly during early 2016 and prior to that at the height of the global

financial crisis. Both such occasions corresponded with a crash and subsequent

recovery in oil prices.

     The PBOC is widely expected to continue easing monetary policy over the

coming months following its recent announcement of a 100bps RRR cut. The cut,

and expectations of more to come have seen interest rate swaps extend their

declines, while stocks have failed to mount a strong bullish reversal.

     --TRADE WAR TABLES TURNING?

     The China stagnation trade - long bonds and short stocks - was highly

successful in 2018 as trade war fears emerged, with Chinese markets bearing the

brunt of the growth concerns. However, with President Trump under increasing

political pressure to find a quick win as his economic credibility comes under

pressure from the recent U.S. equity market rout, Beijing may be gaining the

upper hand in trade talks.

     One of the main reasons why equity dividend yields have risen above

short-term bond yields only temporarily in the past is that the downside impact

of low oil prices on rate expectations is immediate whereas the upside impact of

lower oil prices on corporate profits and growth takes longer to materialize.

     China's weak manufacturing PMIs over recent months are a clear sign of

economic slowdown, and we are skeptical as to the efficacy of liquidity easing

measures in addressing structural growth headwinds. However, the headline

figures ignore the drop in input prices which look set to boost profit margins

in the industrial sector helping a recovery in output growth.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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