Chinese Oktoberfest

While getting bored at the screens and watching, as once James Montier wrote, how "Mr. Market suffers chronic bi-polar disorder" caused by megatons of reflated dopamine, there is case for Chinese Oktoberfest.

This time around Oktoberfest has nothing common with Munich, except the German portion in the foreign trade with China, but the statistical data set released by China for October month today. It is almost perfect China wonderland, according to Nomura.

There were, however, 2 issues that caught my eye, thanks to economists at Societe Generale:

As with all things China, the markets are quick to get excited, even if that means inherently contradicting themselves. Despite the data showing a uniform robust acceleration in industrial output and retail trade, robust fixed asset investment and a surging trade surplus, the market tripped itself up on stalling bank lending and an unexpected 0.1% dip in deflation. In themselves these send contradictory policy signals. That deflation prevails amongst such strong monetary stimulus and accelerating activity would suggest the economy is still operating below capacity. The drop in bank lending on the other would be suggestive that the very "visible hand" of Beijing is guiding policy to a tighter footing. Looking closer, we find that neither are in fact true.

With M1 and fixed asset investment growth at 30+%, industrial production and retail sales in high teens these guys "dip in deflation"? Asset reflation propaganda in Western world appears to be a wishful thinking? It is, however, statistically unavoidable now, that we will see rising "headline inflation" in West, at least due to base effects, for the coming months.

Click on chart to enlarge, courtesy of BNP Paribas.

Well, there is quite a curious explanation for Chinese case from Societe Generale:

Base effects are distorting the CPI figure. Food and energy effects are falling out of the annual arithmetic, though the National Bureau of Statistics spokesperson did make the unusual comment that he was somewhat "surprised" at the decline in the CPI over the year. What we can conclude is that the pace of monetary expansion in China is not fuelling goods inflation at this stage.

If historical relationships hold, then there should be consumer price inflation picking up in China very soon.

Credit printing in China is a fascinating exercise, that cannot be matched in a free market economy, as economists at Societe Generale conclude:

In terms of the bank lending figures, the market continues to interpret the slower headline figure as a sign that Beijing is in fact tightening lending quotas. Nothing could be further from the truth as we find it. What is simply happening is a changing of the duration of lending with short term financing bills and lending from the start of the year being paid back. Medium to long term lending, though lower, continues to run at a firm pace.

Click on chart to enlarge, courtesy of Societe Generale.

Over October short-term lending and financing bills fell by around CNY260bn. This is recorded as a negative in the lending figures. Medium to long term lending, which is more closely affiliated with infrastructure lending, was CNY250bn over the month. And then there is the seasonal factor - October is well known as a slow month for lending in China. All in all bank lending still looks to be on track for CNY10trn total lending for 2009. That is around 33% of GDP, or broadly equivalent to export share of the economy in 2008.

Coming back to Mr. Market, it appears somewhat disturbing to me that US large caps are leading the way to euphoric adoration (they still have the chance to fail). I would prefer the lead by emerging champions of Asia and Latin America, but they do not operate the markets for my benefit. Not yet ...