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Article / 27 April 2016 at 9:55 GMT

Daily Shot: 'Beijing bounce' on borrowed time?

TradingFloor.com Team / Saxo Bank
Denmark
  • Chinese data show stimulus doing its job
  • How far can Beijing go before addressting fundamentals?
  • Commodities futures jump as gov't money floods market

By Walter Kurtz*

Today we take a look at China where the government stimulus is making its way through the economy. We can see China's budget deficit worsening as the government finances various new projects. 

Deficit
 
The "stimulus effect" is visible in container throughput, power consumption, and excavator sales while the People's Bank of China-orchestrated lower interest rates are helping home sales.

Home sales
 
But nowhere is the stimulus effort more visible than in commodity futures, which have been hit by frenzied speculation. Below is Credit Suisse commenting on the topic.  

Commodities
 
Here we have the aluminum futures in Shanghai for example.
Aluminium

Aluminium
 
In fact, China's regulators have become concerned about this spike in activity and imposed some curbs. 

Regulators

Iron ore
 
The big question now is how long will Bejing continue with this stimulus? After all, these investments by the government don't resolve any fundamental issues in China's economy, kicking the can down the road instead. In fact, this worsens the moral hazard problem and makes the nation's economy even more dependent on investment. A number of economists believe the program will be short-lived for precisely this reason.

Here is a comment from Merrill Lynch.

Merrill Lynch
 
Morgan Stanley's view is consistent with the comments above.
Morgan Stanley
 
In other developments in China, the short-term wealth management products (WMPs) yield is highly elevated versus money market rates. Note that these products invest in longer-dated corporate bonds while "guaranteeing" a fixed return on a short-term product (three-months for example) – a significant asset-liability mismatch. 

The way the program stays afloat is by having new investors coming in to replace those who redeem. This feels just a bit "Ponzi-ish". 

WMPs
 
The mainland's fake imports from Hong Kong have been elevated as capital moved offshore.  

Imports
 
Natixis sees the fake trade volume between HK and mainland "pause" for a while as the rate differential between CNY (the onshore yuan) and CNH (the offshore yuan) shrinks. 

Trade volume
 — Edited by Michael McKenna
* Walter Kurtz is an alias
** This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.

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