Research Edge Portfolio Position: Long CAF
The staggering 28.4 % year over year increase in June M2 data released by the PBOC today took a back seat in the media to the news that foreign currency reserves have topped $2 trillion (see charts below). For the US, this data means that China will continue to buy treasuries. For China this data may mean that more speculative money is flowing into already extended markets.
By all measures the liquidity sloshing through the system is having a pronounced effect, and concerns over the negative impact of these easy money policies are beginning to loom ever larger. With no clear indication that regulators are moving rapidly enough to fully reign in speculative asset bubbles or that any capital injections are being planned for AMCs in order to handle fresh "special mention" loans there is real concern among observers on the ground that there is not enough being done by authorities to prepare for the pain in the pipeline.
From our perspective, the issue is fundamental: China's stimulus program was and is an attempt to buy growth -and growth is always very expensive to purchase. If data shows that internal demand is broadening -in other words that that consumers are buying more than just replacement trucks and vans with government tax rebates and factories are turning out more than just girders and beams for state infrastructure projects, then these measures will likely prove worthwhile despite the negative impact of the inevitable defaults and popping bubbles.
Bullish for the economy in the longer term, but underscoring the risk of correction in the equity and real estate markets in the near term, today's data leaves us with many unanswered questions. In the coming days we will receive Q2 GDP and Industrial Output data that will provide us with more solid answers.