One of the biggest, if not the driving, factor behind the latest bout of the “reflation trade” which has sent bond yields surging (not to mention sending the Chinese stock market into outer space) in a deja vu rerun of the “Great Rotation” of 2013 and 2014, was constant chatter of imminent monetary easing by the People’s Bank of China, and perhaps with good reason: with the Chinese economy hard-landing and growing according to some estimates as low as 1.6%, the Chinese housing market tumbling faster than that of the US in the great financial crisis, the media has been flooded with recurring reports of Chinese QE any minute.
To be sure, the PBOC has given plenty of ammunition for such speculation, having cut both its interest and Reserve Ratio rates twice in 2015.
As a result of constant jawboning that the PBOC may not only cut rates even more but proceed to launch QE (which it will ultimately, just not for a while), both the Shanghai Composite has been trading at multi-year highs and oil has found a bid strong enough that in the past two months it has surged by some 50% on hopes that Chinese demand will finally come back once the local economy is so weak it leaves the PBOC no other choice.
However, two things suggest that the great “reflation” trade is ending.
Overnight, Xinhua reported that after months of plunging housing sales, the all important Chinese housing market, where the bulk of Chinese net worth is located, is rebounding sharply: sales volume of new homes in China’s major cities posted a solid gain in April with the support of the recent policy easing, the latest industry report showed.
New home sales in China’s 30 major cities including Beijing, Shanghai, Guangzhou and Shenzhen surged 15.1 percent in April from the previous month to 16.57 million square meters, also representing an increase of 30.8 percent from the previous year, according to the report released by E-house China R&D Institute, a leading property consultancy.
