Strong August vindicates Beijing's heavy-handed intervention - for now

With key economic metrics stabilizing or even perking up in August, Beijing's heavy-handed stabilization efforts are being vindicated in the early running - adding fuel to the fire for those who despise China's constant cheating of the rules of "free markets", but ironically also likely to earn rare but growing praise from smarting competitors.

All three key data series - industrial production, retail sales, and fixed-asset investment (FAI) - beat expectations. The first two have continued their firming up since early 2015, whilst FAI has continued to fall, but this is not at all unexpected, given the sheer base level:

In a sign of near-term China bullishness, Goldman Sachs is moving to short-term overweight on Chinese stocks. Along this same vein, emerging markets in general are becoming more attractive compared to developed ones, given that the populist backlash in the latter is gathering steam as the US election nears, itself sandwiched between Brexit last June and next spring's important legislative races in France and Germany which are already widely expected to sweep right-wing nationalists to unprecedented power.

Of course, there are still basket cases like Venezuela or Zimbabwe which must be avoided like the plague by emerging market investors, but the overall picture has improved markedly since late 2015, and the short-term pickup in Chinese demand for commodities is the central part of this story.

The medium to long-term outlook for China itself remains cloudy. Doom and gloom could return as investment and industry continue to grind down to neutral; per Goldman's analysis, though, this has likely been delayed to start of 2017, giving the central bank and State Council a welcome breather from further stimulus.

A more recent inset of the above chart, dating back to January 2014, shows that FAI and industrial production fell precipitously in 2014 - the year that the white-hot real-estate market began to cool:

In 2015, both were then stabilized with strong policy support, primarily in the form of benchmark interest rate and reserve requirement ratio (RRR) cuts until the late-June stock market crash, and then with stepped-up fiscal and monetary stimulus overall in the second half in response to the unleashed financial volatility. This helped keep retail sales from falling below double digits throughout 2015, buoying what has since become an ever bigger slice of the overall growth pie (70+ percent in H1 2016); indeed, the slight pickup in industrial production since mid-2015 can only have coincided with the noticeable decline in FAI since late 2015 only because more installed plant capacity has shifted to end-user consumer goods, i.e. retail products; the strong growth in car sales since late 2015 is the poster child for this trend, for the obvious cross-industry impact of the auto sector.

Worth particularly special mention is the sheer scale of the central bank's ongoing stimulus - its "backdoor QE", so to speak. Primarily in the form of special short to medium-term lending facilities to the large state-owned commercial banks, but also in the form of bond sales to these surrogate entities, these when combined with the rapid growth of the municipal bond market to refinance local government administrations have given Beijing far and away the world's biggest monetary easing program over the last 12 to 15 months, propelling its total debt load into outer space. In this light, the yuan's plunge of nearly 8 percent since PBOC's unexpected August 2015 devaluation indeed seems artificially suppressed - the actual pressure on a larger devaluation, though not nearly as great as the most extreme bears (read: Kyle Bass) think, has obviously been much more than Beijing has let on.

With the latest stats, it increasingly appears that these China doom-and-gloomers have essentially missed the boat: by the time they piled on their big bets of a Chinese meltdown last January and February, the worst was already over, and with Beijing's heavy-handed measures to stabilize the real economy, the "L-shaped recovery" which Xi Jinping's administration has enshrined as the country's salvation has been tentatively accomplished.

The question now is whether it will be sustained. The key in this regard will be the latest debt figures, to be released starting tomorrow: these will offer clues as to whether the recent credit binge is in fact moderating, after some cooling of lending activity in July. So a future post here will break down the key credit and financing metrics for August, comparing the change in these to that in real economic activity to give a sense of whether Chinese growth is becoming more sustainable (i.e. not significantly worsening the total debt-to-GDP ratio).