Yesterday Goldman Sachs came up with a bullish call on China equities because they think that the tightening cycle is over, or at least moderating.
They are hardly the first bunch of people saying that: in fact, I have been hearing such rumblings for days. The reason is simple: the government are now concerned with the possibility of hard-landing. A source told me that some industries are now showing weak demand now, and electricity consumption is also low, thus coal prices have been weak. As a result, the market is now wondering if the government will loosen the grip a bit for the time being.
If China does loosen its grip now, that would fit my scenario that China may change its policy stance even they see a slightest sign of slowing down. There are of course some legitimate (but bad) reasons why China would not allow hard-landing to happen, and some of these factors also explain the local governments’ indecision to curb home prices. But by loosening its stance, the Chinese government are bound to make a huge mistake.
Inflation in China stood at 4.9% in February and might rise above 5%. Today’s PMI figure shows that input price component is still on the rise (even though at a slower pace). Thus inflationary pressure is far from softening. Delaying necessary tightening will only lead to a bigger problem later. If the government loosen its stance now and allow the bubble to reflate again, that will only cause an even more severe consequence when the bubble burst later.
To bring inflation down and to let the real estate bubble bursts, China has almost no option but to let the economy plunges into a recession. The government would of course like to see a soft-landing like 1994-1995 where they managed to lower inflation and let the real estate bubble burst without slowing down growth significantly. That however, in my view, was only a lucky coincidence, not a demonstration of the amazing ability of the Chinese central planner.
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This article originally appeared here: China Economy: It Will Be A Huge Mistake If Tightening Cycle Ends Now
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
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