Letter To Shanghai No 1178 - The taxi drivers of Shenzhen

The CSI 300 equity index closed up 4.31% today (Tuesday), the biggest one-day gain for over two years, galvanised by the statements of PBoC Governor Pan Gongsheng, who delivered market-moving policy initiatives on three fronts, although no timetable was given.

1. Monetary policy: the PBoC will cut China's key policy rate, the 7-day reverse repo rate, by 20bp to 1.5%, and the PBoC will cut the reserve requirement ratio (RRR) by 50bp, releasing RMB 1tn of liquidity to banks.
2. Property: mortgage rates will be lowered by around 50bp and the minimum down payment requirement for second homebuyers will be reduced from 25% to 15%.
3. Equities: the PBoC will set up an RMB 500bn swap facility for brokers and funds to buy stocks. It will also set up an RMB 300bn refinancing facility for equities. These would seem to be repo lines for equities that would place more cash into the banking system if used.

However, while these initiatives occupy the headlines, on the streets of China, the taxi drivers of Shenzhen, Hong Kong's nearest neighbour across the border, are waiting an hour and a half outside the largest hospitals to find a fare or, at the airport, they wait in kilometres-long queues for two and a half hours for the opportunity to take a traveller to the city. Although one observation is hardly scientific, for the taxi drivers of Shenzhen, it would seem discretionary spending has dried up.

So why launch the change of economic policy now? Certainly, the Fed rate cut last week is highly influential and has opened the window for China to lower rates without disturbing the comparative interest rate balance. For example, although cutting rates, the offshore RMB strengthened above RMB 7.03 per dollar today, reaching a fresh sixteen-month high, driven by the concept of significant economic stimulus.? Indeed, today's statements are far broader and more positive than could be expected and highlight Beijing's renewed focus on offering economic support and, therefore, fighting deflation. But are they enough to end the longest downturn in China since 1999 on their own? Probably not.

Therefore, Chinese investors will hope that today's announcements merely signal the start of a new campaign and a sense of urgency in Beijing to support the economy. On that basis, most markets have risen. (freight, the speculator's current poison of choice, and available through BANDS, is up 11.5%). How long will it take this newfound energy to affect the outlook for the taxi drivers of Shenzhen? One cannot say, but one might expect they will have to bear the brunt of the economic downturn for somewhat longer.

Have a good day,

John