For the first time since November, PBOC data indicated banks, including the central bank itself, sold a net CNY41.2 billion in June. This compares with the huge average CNY315.2 billion in net purchases by banks during the first five months of 2013. While some claim this outflow as 'transitory' due to Bernanke's 'Taper' talk in June (that has been walked back since), as MNI reports, China's ongoing economic slowdown has market participants continuing to brace for a return to capital outflows. With reform plans critical to China's transition, this 'outflow' adds to the leadership's concerns especially in light of what very few have reported, as SocGen's Albert Edwards notes, the fact that China is on the verge of outright deflation (GDP deflator lowest in over 4 years) as China's over-investment comes home to roost.
Via SocGen's Albert Edwards,
Perhaps, though, the most decisive macro factor for all markets will be any slide into deflation in China. Certainly many see this as conceptually possible because of China?'s heavy over-investment. But is this fear now turning into reality? The recent Q2 GDP data contains the surprising fact that China?s implicit GDP deflator had slowed to only 0.5% yoy ? noticeably weaker than the CPI data. This massive data point has gone virtually unnoticed in the markets (although it was pointed out by our own Wei Yao).
The fact that China is on the verge of outright deflation may prove more important than even Fed tapering.