(PNAFAN – Asia Times) There is no longer any doubt that the People’s Bank of China is tightening its monetary policy.
The daily fixing of the 7-day repo rate, the benchmark for banks’ cost of funds, has stood at around 3.5% in recent days, compared to around 2.5% for most of 2020 .
In addition to guiding interest rates upward, Chinese authorities have ordered banks to increase their capital ratios and restrict lending, and have terminated many online usurious loans (e.g. high interest to students) who masqueraded as fintech.
Chinese regulators are also straddling spendthrift municipalities that have issued huge amounts of bonds backed by local government funding vehicles.
China, in short, is repairing its roof while the sun is shining. With the IMF forecasting 8.4% growth for China in 2021 and the most recent purchasing manager surveys showing rapid expansion in the services sector, China can afford to get out of debt.
Fiscal and monetary stimulus measures kept China out of the Great Recession of 2008-2009 and helped China recover from the Covid-19 contraction in early 2020, but debt build-up cannot last forever. Meanwhile, the United States continues to increase its debt at an unprecedented rate.
This creates a conundrum in the capital markets. The S&P 500 has returned 9% in the year to date, while the Shanghai Composite Index has returned just 2%. Stock markets love cheap money, in part because it keeps investors away from low (or negative) bond market returns, and in part because it allows companies to prepare and invest. increase their earnings per share, at least in the short term.
The question Wall Street strategists debate is: How long can cheap money levitate the US stock market? Goldman Sachs now says the S&P could be up another 5% in 2021. The prospects for an unpleasant reversal are high if economic data disappoint.
China, as William Pesek said on March 26, has gritted its teeth and bothered to grit. China is particularly concerned about global hot capital flows; if the US Treasury finds it difficult to finance its monster deficit, the result could be a global tightening of liquidity with speculative capital outflows from China.
The Chinese authorities are therefore acting responsibly, while America continues to leak its plastic. For the long-term investor, Asian stocks (particularly Chinese and Japanese) are reasonably priced and positioned for sustained growth. If you’re looking for a short-term score, Shanghai isn’t the place to find it this month.
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