It seems China's efforts to stabilize their economy stock market knows no bounds - nowhere better exemplified than the 5% spike in an hour last night after injecting $100bn into the sovereign (rescue) fund - and western observers applaud the efforts as if they are costlessly saving the world. However, there are costs to all this leveraged asset bubble creation (and maintenance) and, as China People's Daily reports, [8] nowhere is that more evident than the surging price of pork (on if China's main CPI components). As Deutsche Bank warns, in the past 15 years, the PBoC has never cut interest rates when inflation was picking up (whether driven by food or more broad-based); so the fate of an 'easy money' inspired stock market bubble remains in the hands hoofs of pigs as the policy stance will be forced to turn from loosening to neutral in Q4 as inflation rises.
Just keep pumping money in right?
[9]
Well there are consequences... (via China People's Daily) [8]
The price of pork in China has been rising for a couple of months now, with a new uplift record in 3 years. According to the National Bureau of Statistics (NBS), starting in March, the price of pork has been rising for 4 months with a total of a 5.7 yuan rise. In China, the price on pork is closely related to the CPI (Consumer Price Index). Experts interpret that the price of pork will keep on rising and drive the rise of CPI at the same time. Consequently, the CPI of the latter half of the year is expected to be a little higher than the first half of the year, but there is no strong sign of inflation.
[10]
Statistics of NBS show that from March 18 to July 20, the price of pork has risen almost 50 percent. The current price on pork ranks the highest since the year of 2012. Based on previous experience, the price on pork usually would have an "outburst" every 2 to 3 years. The last "pork cycle" happened during June 2010 to June 2011. It seems like a new round of the “pork cycle” is around the corner. Because of being under the oversupply for a long period of time, many small and medium-sized farmers' quit their jobs- a major driver of appreciation.
In China, the price of pork is one of the main components of the CPI. In 2010, the rise in the price of pork and vegetables was taken as the dominant factor that caused the rise of CPI in the fourth quarter.
And, as Deutsche's Jim Reid notes, there are actions after those consequences...
Yesterday our economics team in China highlighted the recent surge in pork prices for the country in recent weeks. They noted that having stayed negative for 14 consecutive months since the beginning of 2014 (averaging -4.2% in the time), the yoy growth of pork prices turned positive in March (+2%) and averaged nearly 7% in Q2 (8.3% in April, 5.3% in May and 7.0% in June). Pork prices have typically been the driving force for CPI in past cycles and they expect prices to remain on the rise for the next 6 to 12 months, reinforcing their view that CPI will be on an upward trend in H2.
Our colleagues also point that in the past 15 years, the PBoC has never cut interest rates when inflation was picking up (whether driven by food or more broad-based) and so believe that this could constrain the room for further easing beyond one cut (and one further RRR cut) in Q3 this year.
They then expect the policy stance to turn from loosening to neutral in Q4 as inflation rises and growth picks up slightly.
Furthermore, considering all factors, we believe recent development raises the probability for the government to cut growth target for 2016 to 6.5% from 7%.
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So, simply put, the fate of China's economy, stock market, and monetary policy is in the hands of pigs (the porcine type, not the humane type)... just as it forced PBoC's hand in 2011... so be careful what you wish for.
