Can China CTRL-P Again?

China's August scare is a false alarm as fiscal crunch fades

On cue, the economy is already coming back to life after hitting a brick wall over the winter. Credit growth jumped to a 31-month high in July. The monetary base has grown at a 20pc rate over the last three months, implying an economic spike later this year.

...Given the sanctions and given that China has a trade surplus of $600bn or 6pc of GDP - and is therefore accumulating foreign exchange at blistering pace, ceteris paribus - there is no chance whatsoever that reserve losses will spin out of control.

So reserves flatline as money supply growth accelerates. At some point, fundamentals come into play. If it doesn't lead to devaluation today, it will lead to devaluation or rapid inflation later.

At the risk of sticking my neck out, I think that Gothic warnings of a Chinese collapse this year will look silly by Christmas. The reckoning has been delayed again.

The "devaluation" saga this month is a red herring. The PBOC has switched from a dollar peg to a 'managed float' to protect itself from any further surge in the US dollar as the Fed tightens policy.

...None of this is to say that China's economy is healthy. Credit still rising by seven percentage points of GDP each year, pushing the debt ratio ever further into the danger zone. It will be 270pc by next year. This will end badly.

But China is not in immediate crisis. The Reserve Requirement Ratio (RRR) for banks is still 18.5pc. The PBOC can slash this to 6pc - as did in the late 1990s - flooding the system with $3 trillion of liquidity. It can even go to zero in extremis.

The time to worry is when China has exhausted this last buffer. This August scare of 2015 is a false alarm.

I don't believe this will work, but if it does...