Is it really China’s growth story that has distressed the markets as alleged by media?
Let us further examine what media imputes as the cause of this week’s profit taking—a purported slowdown of China’s economy
While recent economic data may have been a valid bearer of bad news, correlation does not necessarily translate to causation.
Movements of the China’s Shanghai index (right window) have not aligned with the motions of the China’s industrial production index (left window; blue line) which seesawed throughout 2010-2011.
In addition, the vigorous rally by the Chinese equity benchmark this year seems to have little relevance with the movement of the (HSBC PMI Index) manufacturing survey and of the ex-post statistical data.
China bulls have been arguing the case that the Chinese government would ease further[1] given the ‘moderating’ pace of price inflation attendant to the current slowdown. And they just may be right.
Almost as reports came where manufacturing in China’s economy contracted for the fifth month[2], the Chinese government selectively cut reserve requirements[3] for the Agricultural Bank of China, to supposedly boost rural credit.
With emergent signs of heightened political risks, a full blown economic crisis would magnify the prospects of a potential upheaval, which should compel authorities to resort to magical tricks by resorting to monetary palliatives.
Incipient signs political destabilization may have resurfaced. Aside from previous instances of riots[4], rumors swirled on the cyberspace of a coup attempt following the removal[5] of the Communist Party’s Chongqing city head Bo Xilai from his post as his deputy and has reportedly sought asylum in the US.
The rumors have been censored and have been temporarily concealed from the public.
But markets may have been exhibiting otherwise. China’s credit default swap or the cost of insuring China’s debts rose significantly the highest in four months[6] The Shanghai index staggered to close the week down 2% despite the monetary easing policies.
Nonetheless this is a revelation that there may have been intensifying political tensions from an ongoing ideologically based power struggle[7].
Entrepreneurs seem to have been gaining political clout in China, enough to exert influence on Communist party members to call for economic reforms based on liberalization.
Bottom up forces have been vastly eroding the command and control politics and thus the ideologically based political infighting.
As I said last October[8], China represents as my potential black swan (low probability high impact event). The risks from China’s unique political economic conditions have been substantially underrated. China, for me, has greater immediate term risk relative to that of the US or the EU, where political authorities of the latter seem to be working in close collaboration.
It should be noted that the political spectrum of the EU and the US seem to be deeply intertwined (e.g. Mario Draghi is a Goldman Sachs alumnus[9]) and has been manifested through revolving door relationships[10]. In short, vested interest groups through captured political authorities can coordinate policies, to the extent where the adverse effects from such policies may be deferred.
It’s a lot different in China.
China’s copycat of western Keynesian policies have led to massive internal bubbles, blatant misreporting of issued loans and financial innovative arbitrages by the political class, particularly the local governments, whom has circumvented party regulations by setting up 6,000 finance companies to raise funds for public works[11].
The negative effects of such top down policies have not only bred corruption, it has sown political conflicts which run the risks of escalation and transition to violent political uprisings.
The bottom line is that China’s behind the scene political struggles have been seeping out into the public and will be manifested through price signals in the marketplace, despite repeated attempts by political authorities to expurgate such developments.
This should be monitored closely.
Until further evidence shows of a serious deterioration of China’s political conditions, then my assumption would remain transfixed towards the politicized nature of today’s global marketplace which has been designed to support financial markets for the benefit of the banking system and the welfare state.
As for media, they could be looking at the wrong angle.
[1] US Global Investors Investor Alert - Appreciating China to its Fullest, March 9, 2012
[2] Bloomberg News China Manufacturing Contraction May Worsen, HSBC PMI Shows Bloomberg News March 22, 2012 SFGate.com
[3] Nasdaq Brace for more stimulus: Central Bank of China slashes reserve requirements, March 22, 2012
[4] See Does Growing Signs of People Power Upheavals in China Presage a ‘China Spring’? September 26, 2012
[5] The Economic Times, Censors block online rumors about coup as China battles infighting within ruling party March 24, 2012
[6] Thestandard.com.hk Business as usual after coup rumors spark jump in credit-default swaps March 22, 2012
[7] See China’s Coup Rumors: Signs of the Twilight of Centralized Government? March 22, 2012
[8] See Can China’s Slowdown Trigger a 1987 moment? October 23, 2011
[9] See ECB’s Mario Draghi’s Baptism of Fire: Surprise Interest Rate Cut, November 4, 2011
[10] Corporate Europe Observatory Block the revolving door, November 23, 2011
[11] Bloomberg.com China Banks Said to Underestimate Local Government Risks March 24, 2012
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