It may seem silly to consider China’s 9.2% rise in industrial production a disappointment and weak, but you have to look at it in context—growth over 8% needs this kind of support. More interesting than the economic arithmetic is the persistence of confidence in central bank policy boosts. The drop in inflation to under 2% supposedly gives the central bank the latitude to ramp up stimulus initiatives. This is not good. For one thing, the data is questionable. Inflation was 6.5% in July a year ago. Can it really have fallen to under 2% in a year—honestly? The average for 1994 to 2012 is 4.29%.
But apart from questionable data, the entire financial world is urging the central bank to engage in boosts without asking whether boosts are a good thing or the only thing. Reliance on central banks for every blessed thing an economy might need is getting out of hand. It’s probably a good thing the ECB can’t do QE or we wouldn’t have a clue how to price any bond anywhere. Further, The Economist says combined local and central government debt is about 50% of GDP, but local government debt at ¥10.7 trillion is dated to end-2010. This is awfully old information. We have no idea what government debt really is in China or what rating it would deserve, objectively.
So if the Chinese government spends on growth initiatives and/or the central banks opens up the property bubble spigot again, not having really closed it fully shut in the first place, how can it be good for the long-term robustness and stability of the Chinese economy? Fortunately, Chinese policy-makers engage in long-term planning so maybe a few people have the real numbers and a proper perspective. But not so fortunately, the change in leadership encourages flashy short-term initiatives to keep the natives from getting restless, just like anywhere else in the world and any other time in history. We fear this will not end well.
Apart from the reliance on central banks that has become so pervasive, China is a bit of a distraction from the main event, which we see as Draghi’s credibility. So far the euro pullback is mild and we see support around 1.2250. A bounce could take it to 1.2450 in no time, but what the trigger might be is anyone’s guess.
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