It appears - according to the narrative assigned by the mainstream media - that any weakness in asset prices should be bought because China will inevitably have to unleash pure QE (as opposed to the modestly watered down version currently underway) or some combination of RRR cuts. This is 'western' thinking as the go to policy of the rest of the world's central banks has been - put on pants, print money, paper over cracks, proclaim victory. However, in China there is one big problem with this... stoking inflation... and most crucially the social unrest concerns when suddenly a nation of newly minted equity losers can no longer afford their pork (which is facing record shortages)...
As SocGen notes, the infamous pork cycle is heating up again...
Pork prices in the CPI basket have risen 17.4% since May and were up 16.7% yoy in July, which accounted for half of the headline CPI reading of 1.6% yoy.
The current cycle is similar to the previous two disruptive cycles in terms of supply shortages... [ZH - but considerably worse!!!]
Pork prices will probably keep rising and push CPI above 2% yoy in the coming months, but the chance of CPI going much beyond 3% is limited in our view.
Nevertheless, this inflation outlook is still likely to restrain the central bank’s scope for policy rate cuts.
So, as SocGen concludes, judging from recent activity data, the economy is still under immense downward pressure. Furthermore, supply-driven inflation is by nature deflationary, as higher pork prices can squeeze other consumption in the absence of any acceleration in income growth.
Therefore, fiscal policy has to step up, and monetary policy is likely to play an assisting role by providing targeted liquidity. It seems that the focus at the moment is on the indirect channels of policy bank funding support to infrastructure investment.
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In other words, do not expect some broad based liquidity infusion (RRR cuts or QE) - policy reaction, just as we have seen in the stock market manipulation, will be piecemeal and focused.