Salient to Investors:

China’s day of reckoning is delayed again as it is reverts to credit stimulus after attempts to engineer a stock market boom have failed. Economic growth will accelerate over the next few months, giving global commodity markets a brief reprieve.

Robin Brooks at Goldman Sachs estimates that capital outflows reached a record $224 billion in Q2 2015. Charles Dumas at Lombard Street Research says capital outflows reached $800 billion over the past year.

The Dutch CPB’s world trade index shows that shipping volumes have been negative in 4 of the past 5 months which is extremely rare and usually implies a global recession.

China suspended half the shares traded in Shanghai and Shenzhen, halted new floats, pressured 300 corporations into buying back their own shares, and hunted down short sellers. Caixin says the China Securities Finance Corporation owns an estimated $200 billion of Chinese stocks and has authority to buy a further $500 billion if necessary to prop up the market. Michael Pettis at Peking University says brute force has done the trick as equities have recovered.

Xi Jinping’s 2013 pledge to let market forces play the decisive role in the economy is broken and his failure to see through this reform strategy is fatal for China’s economy.

In 2012, the World Bank and China’s Development Research Center warned that China’s 30-yr growth model was obsolete and that the low-hanging fruit of state-driven industrialization had been picked.

Capital Economics, Oxford Economics, and Lombard Street Research say China’s true economic growth rate is currently below 4%.

China produced more cement between 2011 and 2013 than the US in the entire 20th century.

China’s ratio of private credit to GDP has jumped sixfold to 160% of GDP since 2007, and far beyond any safe level for a developing economy.

Adam Slater at Oxford Economics says easing measures since late 2014 have not kept pace with tightening conditions and if China wants to quickly ease monetary conditions, then exchange rate depreciation would be the obvious way to go. However this would anger Washington and risk a beggar-thy-neighbor currency war across Asia.


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