China’s Not Doing Global Markets Any Favors

An economic slowdown in China is the biggest risk facing markets, according to Bank of America’s monthly investor survey. So it should be good news that the most recent data indicate the Asian nation’s economy is perking up. The problem, as seen in the performance of global stocks Monday, is that the economy may be rebounding a bit too strongly, leading the People’s Bank of China to pull back on its latest stimulus measures.

The PBOC admitted as much late Monday local time, saying it will keep good control of the money supply “floodgate” and not “flood” the economy with excessive liquidity as the economy improves. For many market participants, the announcement was a chief reason stocks struggled, with those in the U.S. falling. This year’s stunning rebound in equities and other riskier assets can be tied directly to the dovish pivot by the Federal Reserve and other top central banks. A custom index measuring M2 figures for 12 major economies including the U.S., China, the euro zone and Japan shows their aggregate money supply has risen by $1.63 trillion this year to $74.7 trillion in April. That contrasts with a decline of $3.31 trillion between April and October of 2018, a tightening of liquidity that contributed to the big sell-off at the end of last year. This just serves to underscore how markets continue to be dependent on central bank largess. A decade after the financial crisis, “they are still here and still dominating and controlling all of the markets with the money they created out of thin air and then parceled out, in various manners, to the marketplace,” Mark Grant, the chief global strategist for fixed income at B. Riley FBR, wrote in a morning note Monday. “To put it another way, before 2008/2009 they were ‘part of the Game.’ Now, they ‘are the Game’ and no institution on Earth has the financial capacity to compete with them.”