While the Australian share market continues to merrily price mining stocks on the assumption of imminent Chinese stimulus, knowing in its heart of hearts that it runs China better than the Chinese, those same Schumpeterian communists have their shakeout firmly on track.
Following some furious PBOC liquidity drainage, interbank markets are now firmly back in the austere ranges we’ve come to know and love for the past year:
And let me share a few more charts with you from Credit Suisse’s Dong Tao to illustrate the goal. There is absolutely no let up in the pressure on corporate debt spreads:
And the reason for the policy is that Chinese credit traction vis-a-vis growth has fallen away:
And so, it needs to flush out the ponzi borrowers to restore productivity-based growth. That can only happen if said unproductive debt is squeezed out:
Growth is going to fall as this process transpires so more fiscal spending is inevitable but it will be targeted enough to ensure that the process itself runs on. China is aiming for a glide path lower and it’ll tighten and loosen as the shakeout develops but at some point it’ll probably turn disorderly in some measure:
At that point we’ll risk a hard-landing, bailouts and an economic rescue, and further long term downgrades to growth, as well as an accelerated shift in the composition of growth to less commodity-intensive drivers.
