Monday, May 16, 2016

A better way to trade the China slowdown

China has been undergoing a series of stop-start growth spurts mini-cycles, courtesy of credit driven stimulus programs (chart via RBS):

The size of the latest Q1 financing induced boom was extraordinary, as it hinted at panic by the authorities. For some perspective, credit expansion in Q1 2016 was somewhere between the GDP of Indonesia and Mexico:

Much of the extra liquidity sloshing around the system has created a great ball of money that has bounced around from one asset class to another, such as property, stocks and commodities.

Coming off a sugar high
I have written about the market fears of China slowdown before (see Tactically taking profits in the commodity and reflation trade), the data coming from last weekend seems to confirm that the sugar high of credit driven stimulus is starting to wear off (via Bloomberg):
The April readings marked a sharp swing in fortunes, especially in new credit: where March saw aggregate financing jump by more than all economists had forecast, April’s number undershot all 26 predictions. Such gyrations -- long a feature of the nation’s stock market -- add to the challenge for policy makers and foreign investors seeking to get a read on an economy caught in a multi-year slowdown and struggling to stabilize.
Total social financing plummeted to levels not seen since 2013 (Deutsche Bank via Business Insider):

Things got so bad that the PBoC felt compelled to reassure the markets that it would continue to support the economy through monetary policy (via Bloomberg):
China’s central bank reassured investors that monetary policy will continue to support the economy after a sharp slowdown in new credit last month, and said the lending slump was temporary.

The deceleration in the growth of new yuan loans in April was mainly due to a pick-up in a program to swap high-cost local government debt for cheaper municipal bonds, the People’s Bank of China said in a statement on its website on Saturday. No less than 350 billion yuan ($53.6 billion) of such swaps were conducted last month, while aggregating financing growth was affected partly by a decrease in corporate bond issuance, according to the central bank.
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