If anyone is still confused about the not so subtle dynamics between markets and monetary policy in China, or the country’s bipolar, and ever more frequent boom and bust cycles, you won’t be after seeing this chart from Socgen.
If still unclear, here is SocGen’s explanation:
Our economists expect China’s structural deceleration to continue over the coming years and it should thus remain a major source of uncertainty for commodity prices and equity markets alike. The recent recovery in Q1 16 was based on a sharp rebound in the property sector and significant credit injections.
This stimulus can only be temporary, as it increases debt in the system, keeps zombie companies alive, and defers reforms, at the cost of higher risk for financial stability in the future. Policymakers are aware of the risks coming from an overheating housing market and excessive debt build-up. As long as the recovery in the property keeps going, the economy could perform more or less in line with market expectations.
But, as Chinese authorities will eventually reduce credit easing, we expect the economy to return on its deceleration path in the coming quarters. The economy is thus likely to continue suffering from a series of mini boom-and-bust-cycles that will create repeated periods of volatility.
We just had a 3 months period of stability. Following the latest Yuan fixing released moments ago, which at 6.5693 was the lowest since March 2011, it sounds like we are about to have some volatility.
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