Pervalle Global Blog - China Stimulus: Don't Hold Your Breath

March 2019

posted by Pervalle Global Macro Fund
1mo ago 178

The credit situation in China over the past few months has increasingly concerned us given the swift deterioration in three of the main four credit buckets, and suspicious characteristics of growth in the fourth – such as large increases in bill financings. We are less worried that a severe credit crunch is on the near-term horizon, but nervous that China will not be able to expand credit at a sufficient rate to drive both domestic and global growth. If our assumption is correct, China’s domestic data, as well as the global PMI, will continue to move lower until at least Q419. This will leave many market participants off-sides, as the consensus view is that China is materially increasing stimulus, leading to a bottom in the economic data. We find evidence proving the opposite is true.

In October, we put out a piece that argued there was a strong probability that Chinese M1 growth would turn higher between November and January given our leading indicators, which would inflect global growth higher in 2H19 as M1 leads by 9-12 months. We referenced China’s RRR cuts as a catalyst for higher M1 growth based on its four-month lead, as shown below. Four months later, we have still not seen China's M1 turn higher or stabilize, which may be an indication that China’s credit transmission mechanism is stalling or no longer working.

The entire article can be viewed here.