In the George Costanza market way of thinking, poor data is good because it means more easing. That was certainly the case yesterday as a bevy of Chinese data (industrial production, retail sales) was worse than expected, yet equities held in. In fact, commodity type of equities – those most tied to China – were the best performers yesterday as expectations rose for China easing. Overnight, we've had another round of poor Chinese news – I guess we need to be shocked the market has not gapped up 1% on it, as the worse it gets the more policy action "must" happen.
- Chinese data dealt policymakers fresh blows on Friday as trade and new bank lending suggested pro-growth policies have been slow to gain traction and more urgent action may be needed to stabilize the economy. Figures on Friday showing July exports rose just 1 percent from a year ago and that new loans were at a 10-month low added to data on Thursday showing factory output rising at its lowest pace in three years and pricing power fading.
- Net new bank lending in July of just 540 billion yuan versus expectations of 690 billion yuan is a big potential cause of concern. Bank loans are the main credit creation mechanism in the economy, which is only in the early stages of reforming capital markets to boost available sources of corporate finance.
- Excluding a fall in exports in January, the 1 percent rise in July is the weakest since November 2009 and marked a big pullback from annual growth in June of more than 11 percent, Reuters data shows. Shipments to the European Union dropped more than 16 percent. July imports rose 4.7 percent from a year earlier, the weakest pace since April and also well short of expectations for an increase of 7.2 percent.
Which means of course…
- "We think the central bank should move as quickly as possible to stabilize the economy. I expect there will be at least one more RRR cut and interest rate cut this quarter," Xiao Bo, economist at Huarong Securities in Beijing, told Reuters.
- Some economists say the central bank could move as early as this weekend to ease policy. It has reduced banks' required reserve ratio (RRR) in three steps since November to free up an estimated 1.2 trillion yuan ($190 billion) for new lending and cut interest rates in June and July.
Of course it is not going to be as easy as 2009 when the Chinese flooded the economy with something on order of 15%+ of GDP – leading a ton of bad loans.
- The government though is conscious of the risk of loading the economy up with too much cheap credit, as it did during 2008-09 when it unveiled a 4 trillion yuan stimulus program and let local governments go on a borrowing binge that saw them rack up some 10.7 trillion yuan in debt by the end of 2010. Analysts think as much as 2-3 trillion yuan of those loans may have turned sour and might never be repaid. Beijing does not want a repeat performance and it could be one reason for July's relatively muted new loan data.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog