We all scream for monetary easing
I scream; you scream; Chinese economic data scream for decisive monetary easing.
The latest economic data significantly missed to the downside and are moving deep into deflationary territory.
The August producer price index fell nearly 6% year over year, with industrial production and fixed asset investment leading the way down. Only retail sales posted positive results.
Industrial product grew 6.1% year over year in August, missing consensus estimates. However, industrial output at state owned enterprises dropped 0.6% year over year, the first contraction in recent history. Sedan production, in particular, plunged 23.3% year over year. Fixed asset investment also took a big hit. Year-to-date, it sank 10.9% year over year on lackluster manufacturing and real estate investment. Retail sales in August jumped 10.8% year over year.
At the World Economic Forum in Dalian last week, Premier Li Keqiang said China needs a strong fourth quarter and ample liquidity in order to meet its growth target of 7%.
But there appears to be simply no understanding among monetary and economic policy makers of what’s required, of what went wrong, and how to fix it. At the People’s Bank of China there appears to be different groups at work in different rooms without mutual interaction.
One department injects money into the markets, while another intervenes in the currency market, withdrawing liquidity and removing any benefit from the injection.
Asia Unhedged has said it before and we’ll say it again. China needs to loosen its monetary policy and lower interest rates. However, unlike European Central Bank President Mario Draghi, no one at the PBOC has the wherewithal to lower interest rates by whatever it takes to stabilize the markets and get the economic engines moving again.
In light of all this, it looks like it’s too early to wade back into the A-shares. However, if the PBOC gets its act together, the major banks may be a good buy.