Posted in: Market News
Published:
January 2, 2020 1:30 PM UTC

The People’s Bank of China (PBOC) Just Inflated More Air into the Stock Market Bubble

Wall Street and global stocks are off to a good start in 2020 after the People's Bank of China provided a fresh liquidity boost to Chinese banks.

  • Global stocks kick off 2020 in fine form, with Europe, Asia and North America markets posting firm gains.
  • Markets surged after the People’s Bank of China announced a fresh dose of monetary easing, essentially lowering the amount of reserves banks need to keep on hold at the central bank.
  • China isn’t the only major economy running on monetary easing; Europe, the United States and Japan continue to rely on low-rate stimulus.

Wall Street and global stocks launched higher on Thursday, the first full trading day of 2020, after the People’s Bank of China (PBOC) initiated fresh easing measures to prop up a sagging economy.

Markets from Hong Kong to London posted firm gains throughout the day.

Global Stocks Surge

Chinese markets opened the year sharply higher, with the benchmark Shanghai Shenzhen CSI 300 Index inching closer to its 52-week high. The index closed up 1.4% at 4,152.24.

Mainland China’s benchmark stock index is fast-approaching its 52-week high. | Chart: Bloomberg

The Shanghai Composite Index climbed 1.2% to settle at 3,085.20.

In Europe, the benchmark Stoxx 600 index jumped 1% in early afternoon trading. The U.K.’s FTSE 100 and Germany’s DAX each rose 1%.

Dow futures exploded higher ahead of the opening bell in New York. The Dow Jones Industrial Average rose by almost 200 points through the early morning session and was last seen trading at highs.

PBOC Steps Up Stimulus Effort

The People’s Bank of China put a solid foundation under the stock market by announcing fresh stimulus measures on New Year’s Day.

On its website, PBOC said it will lower banks’ reserve requirement ratio (RRR) by 50 basis points beginning on Jan. 6. The move essentially frees up more liquidity that banks can use to lend to businesses and consumers. Conventional wisdom tells us that borrowing is good for the economy.

In an interview with The Wall Street Journal, Rabobank analyst Bas van Geffen said China’s stimulus push is not only good for the economy, but for European exporters as well. Nathan Chow of DBS Bank also told the Journal that cutting reserve requirements would reduce funding pressure on banks.

As Reuters reports, PBOC has cut its reserve requirement ratio eight times since early 2018. Over that stretch, China’s rate of economic growth has fallen to the lowest in almost 30 years. Chinese gross domestic product expanded just 6% annually in the third quarter, down from 6.2% during the previous quarter.

The Trump-led trade war against Beijing pushed Chinese manufacturers into recession last year. Although figures are improving, the country’s factory base is still struggling.

China isn’t the only major economy to be running on stimulus. Central banks around the world slashed interest rates 66 times in 2019 as policymakers sought to prop up weak economies through conventional easing measures. Inflows into all kinds of fixed-income funds rose every single week throughout the year, marking the largest expansion in almost two decades.

Excessive stimulus in China, the United States and other parts of the world has led some analysts to declare that global markets are in a dangerous bubble. Nobel Laureate Robert Shiller has already warned of “bubbles everywhere” in today’s market. Other analysts believe conditions are ripe for a major market downturn as early as this year.

Scott Minerd of Guggenheim Partners says current market conditions are a lot like 1998 just before the S&P 500 shaved nearly 20% over a 45-day correction. Like others, Minerd says the Federal Reserve is propping up America’s expansion but can only do so much to prevent the inevitable downturn.

The Fed capitulated to Donald Trump last year by cutting interest rates three times. It has also stepped up efforts in the overnight lending market, including conducting the largest-ever repo operation.

This article was edited by Josiah Wilmoth.

Last modified: January 22, 2020 11:40 PM UTC

Sam Bourgi @hsbourgi

Financial Editor of CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE, Yahoo Finance and Forbes. Sam is based in Ontario, Canada and can be contacted at sam.bourgi@ccn.com

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