More China Stimulus? -

[The Machine]

CHINA'S economic data published last week set the table for another major round of economic stimulus by the government in Beijing.

Now there's good reason to doubt whether that stimulus will do anything useful. But remember, last time China went all in on intervention in 2009, it marked the beginning of a rally in Australian stocks and commodity prices. There's a lot at stake here, in other words.

Does the latest Chinese economic data justify more aggressive intervention by the Communist Party of China? Well, consumer prices are only rising at 1.8% per year, according to official statistics. That means the government can spend more money without worrying about the social instability created by rising fuel and food prices, at least for now.

Dig a little deeper and you'll see that fixed asset investment grew at 20.4% in the last twelve months. That's slower than average. And fixed asset investment is the best measurement of government infrastructure and building projects that generate demand for Australian resources. Investment — government and otherwise — has been one of the big engines of Chinese GDP growth over the last twenty years.

Of course the other big engine is exports. On Friday, we learned Chinese exports grew at just 1% year-over-year in July. That was down from 11.3% in June. If exports aren't consistently firing, then job creation and social stability are threatened. All of this macro data on China adds up to some combination of lower interest rates, lower bank reserve requirement rations, and higher government spending ahead.

Whether those measures will create a rally in stocks is a different story. The story of the last three years is that each new government intervention into the market creates smaller and shorter rallies. The first few hits of quantitative easing lowered rates and moved money out of 'safe' assets into 'risk assets'.

But investors are wise to the trick now. You can punish savers by driving down rates. You can force investors to become speculators. But you can't force people to take economic activity that they know in their bones is a fraud. Well, you can probably force some of them. But not all of them.