Quote of the Day from China

FT: "On Monday, Zhu Baoliang, director of economic forecast department of the State Information Centre, a government research agency, told Reuters the stock market crash was having a deep impact on the real economy and that it was essential for the authorities to cut interest rates and loosen monetary policy further.”

Christopher Balding: First, apparently Mr. Zhu has not talked to his PR and own statistics bureau. China is achieving 7% GDP growth and anyone who says otherwise is mocked and ridiculed by the Global Times and the China Daily. Second, apparently Mr. Zhu needs a basic introduction in macro-economics. Lowering interest rates is going to place enormous stress on the RMB/$ peg and further pushing capital to leave the country. Third, in breaking news, apparently Mr. Zhu has been re-assigned to a county statistics bureau in Inner Mongolia.

China's government is playing wack-a-mole with economic instability.

The previous round of pessimism came in the bond markets where total debt rose from 100% of GDP in 2008 to 250% by the end of 2014, where nonfinancial corporate debt alone stood at $14.2tn. The People’s Bank of China was reported to have injected as much as $294B into the economy late last year and has cut the one-year lending rate four times since then (now at 4.85%).

Money was already leaving the system before the downturn in the stock market. "According to one report, nearly $250b left China in the second quarter when the stock market was booming for most of that time.  Imagine how fast capital will flee if the stock market is not booming."

Just like in the US, investors sought higher returns by shifting from bonds to equities. This inflates asset prices and creates financial instability, as Claudio Borio has trumpeted here, here and here. No wonder the Chinese equities have been on a tear since the debt uncertainty.