Sunday, July 19, 2015

2015-06 Relative Price Trends

Consumer prices increased 1.4% year-over-year in May, whereas purchasing prices fell 5.6% over the same period. This marks China’s 43nd month of economic contraction.

As usual, commentators quoted by the mainstream financial media maintain their sentiment that up is down, and left should be further to the right.  Mr. Li-Gang Liu, chief China economist at Australia & New Zealand Banking Group, was quoted by Bloomberg as saying "As deflation risk remains elevated and market sentiment deteriorated sharply amid the stock market slump, China’s monetary and fiscal policies will have to become more supportive."

What could be more supportive than cutting interest rates and reserve requirements four times since November, halting all initial public offerings, organizing the largest re-nationalization of Chinese industry since 2009, and posting online that the People's Bank of China will provide "ample liquidity" to the stock market
“Consumer prices signal stronger demand,” said Zhu Qibing, an analyst at China Minzu Securities Co. “But the figure is still lingering at a low level. The central bank doesn’t need to worry about inflation for now.”

That’s a relief for the People’s Bank of China, which has joined other government bodies in the effort to halt a month-long slide in stocks that threatens to derail signs of economic stabilization. ...

“The People’s Bank of China has already ratcheted up its easing efforts,” Bloomberg’s Chief Asia Economist Tom Orlik wrote in a note. “With market turbulence reinforcing the argument for further easing, we continue to expect a further rate cut by the end of the year.”
 In just that one article, the author implied that a three year bull market with triple digits represents "economic stabilization", whereas a "month-long slide in stocks" threatens stability.  At the same time, another Bloomberg employee is quoted as saying this is all "market turbulence".  How about we first understand the causes of the tremendous run-up in Chinese equities, as well as the causes of the sharp downfall, before we begin proscribing policy responses?