Chinese Tapering While The World Eases

It is easy to ease but hard to taper – just look at the Fed.

The mini liquidity crunch in China appears to be expected even as CNY fixes to a new record of 6.0802 today against the USD. Strategists all around are calling it in line with the tax payment on 24th Oct and the regular reserves payment today and really nothing to worry about.

The authorities are not intervening to ease the squeeze and have been seen draining since last week which is a flashback of the Jun-Jul liquidity drain and getting on the nerves of the market.

Either way, we really do not know how to look at China as she dominates headlines in both good and bad light.

Investors are still bearish to varying degrees, citing the following problems.

* Runaway property markets with Shanghai average new home prices soaring 12% in the week ended Oct 20 and outstanding property loans rising 19% YoY

* Bad Debts tripling in the first half of this year and fledgling infrastructure loans to local governments

* Shadow Banking estimated at 40% of GDP in 2012

* Over capacity
“the steel industry’s profitability was just 0.04% in 2012. Indeed, the profit on two tons of steel was just about enough to buy a lollipop.”

* Low Transparency
What is apparent is the government’s commitment to reforms, their interest rate liberalisation, freeing up the capital markets with Singapore and the UK so far,  given direct access to domestic markets, setting realistic targets for 2014 growth and cleaning up corruption with the biggest fish targeted to date in Zhou Yongkang, mentor of disgraced Bo Xilai.

If indeed they manage to push through these reforms successfully, we will be seeing decent reallocations of capital into China and into CNY assets. With debt to GDP of 207% fueled mainly by easy credit, it is more likely that the situation will be exacerbated when the economy is further liberalised and QE looking likely to remain in full force for a good part of next year.

There were doubts on economic growth which has all been debunked in the latest set of economic data and GDP on track for 7.5% this year.

If I was the PBoC, wouldn’t it make sense to conduct some pre emptive tapering of their own to balance their agenda ?