China Doubling Down – Stimulus to Infinite?

Firstly for context, we recently reported on Japan unleashing negative interest rates in a seemingly last ditch attempt to stimulate growth in a nation drowning in debt and deflation.  Well this week saw their 10 year bond yield fall to MINUS 0.1% and 30 year bond yield plummet to just 0.47%.  This has never happened before in all of history.  People are actually paying (as opposed to getting paid) to hold ‘safe haven’ 10 year bonds and getting just 0.47% for 30 year bonds.  (So much for the ‘it doesn’t yield’ argument against the other safe haven, gold….) Such is the nature of a broken economy, the world’s 3rd largest.

So how about the 2nd largest economy in the world, China?  Whilst Japan holds the trophy for highest debt to GDP in the developed world, China has gone the hardest of late in outright terms accounting for 40% of all global debt creation over the last 7 years.  But like Japan they appear to be hitting something of a debt wall with the well publicised decline in growth and their financial markets. 

So one could be excused for being just a little surprised and even wary when this week they announced they would ramp up stimulus to achieve target growth of 6.5 - 7% over the coming years.

What makes the announcement more amazing is the market’s reaction.  On the expectation such growth will need more steel, ore jumped an all-time record 19% in one session.  Indeed there has been a general feeling of buoyancy across all commodities since.  Of course the Aussie dollar has been pumped in the process, hitting 75c last night which pushed down A$ gold and silver accordingly.  So can this last?

China’s debt is already growing at twice the rate of its GDP or economic growth. (really, we could stop writing there, enough said… but…) Their debt to GDP currently sits at around 350%.  As Japan is showing us so starkly clearly right now, there gets a point where the debt burden outweighs the stimulus.  Saying a target doesn’t make a target.  Be very careful ‘buying’ this announcement and if you do, have your ‘insurance’ in place because it is just inflating the bubble even tighter – the pop will be even worse.  That temporarily higher AUD just made that insurance a little cheaper to buy too…