China Won’t Roll Over Until Liquidity Tightens

This year on October 18th The Communist Party of China will kick off their 19th National Congress and set the leadership for the next five years.It’s an extremely fragile time for incumbents. During this Congress a group of party representatives will review a report from President Xi on what has been achieved in the past five years as well as what he believes the party should work on going forward.If they like what they see, Xi and his administration will stay. If not, then it’s onto the next guy…President Xi has done well for the Chinese people, at least on the surface. (Nevermind the megaton debt bomb that’s bound to explode at some point.)He’s been able to somehow navigate the country through the Mundell-Fleming Trilemma without setting off a full blown banking crisis. And he has the positive growth numbers to point to as evidence.GDP growth has been humming along in the 6-7% range with uncanny consistency.President Xi absolutely loves power and the last thing that he wants is an economic meltdown before this important Congress.So what can a power hungry politician do to guarantee his seat for the next five years?Well he can turn on the liquidity taps.If you’ve been reading Macro Ops for awhile you know that the single most important fundamental to markets is liquidity. Nothing else comes close, which is why the investing legends like Soros, Druck and PTJ kept a close watch on how central bankers and government officials used the liquidity spigot.In China’s case, Xi has made sure that spigot has been running at full bore going into the end of the year. Year over year loan growth to non-financial companies has been cranked up to near 16% — the highest levels seen in nearly 5 years.All of this extra credit creates a huge wall of demand that creates a bunch of economic activity and elevated prices.This liquidity injection is the reason why China A-shares have caught a nice rally over the last three-months.We’ve been on for the ride during the entire breakout because we watch liquidity like a hawk. One of our own Chinese liquidity indicators has been signaling looser liquidity conditions since mid-2016. And right now it’s actually hitting new all time highs!Yes, China has a bunch of long-term debt problems that will inevitably lead to a blow up. But with liquidity conditions this strong it’s suicide to play for the implosion. We need to wait until liquidity tightens up before we see any real financial stress.And our guess is that won’t be happening until President Xi has secured his presidency for the next 5-years.If you aren’t monitoring liquidity conditions around the world you’re really missing out on an extremely effective market timing tool.We check liquidity conditions on a monthly basis in every major market.Click here if you want to see how we monitor U.S. liquidity.