Monday Market Movement – China Buys Us a Strong Bounce

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This time it's China's turn (again) as PBOC Governor Zhou Xiaochuan said "the authorities need to be vigilant for deflationary risks in the economy and have injected liquidity into the financial system."  That was all it took to add 2.5% to the Shanghai Composite, which is now up 100% since last April.  At the same time, Finance Minister Lou Jiwei said China will likely expand the recently announced local government debt relief program.  

Adding to the optimism, Chinese officials fleshed out some details for plans to better connect the economy with the rest of Asia, Africa, the Middle East and Europe with more roads, railways, ports and other related projects.  Meanwhile, flows into Hong Kong via the Stock Connect trading link were approaching a record high after Chinese mutual funds gained approval from the China Securities Regulatory Commission to start making use of the new channel, which has seen disappointing volumes so far.

The only thing not on China's list is building more empty cities, as they are still bailing out builders and Governments from that disaster.  Still, China is on pace to have 82 empty airports by the end of 2015, which will bring them to 230 airports, most of which are extremely underutilized.  

Academically, this is a very interesting excercise as we'll get to see how long Fundamental laws of Economics can be ignored before a country collapses.  China is doing through uneccessary infrastructure and Japan is doing it through immense amounts of debt that they use to paper over their own stumbling economy and aging work-force.  The airport math for China is simple, the per capita GDP in China is $6,807 vs $41,787 in the UK and $53,042 in the US yet airfare is roughly the same in all countries.  In what possible way can the Chinese people afford to use these airports?  

Supply with no demand.  That's why China has dozens of entire cities with no people in them.  They've been "building" their economy this way for years and that has created false demand for commodities (as they were using them to build things no one wanted or needed) and now they have a surplus that will take the better part of a decade to work off.  

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