The last month, and especially the last two weeks, has seen a reversal in all the trades that tend to work in a world of increasing Chinese credit and infrastructure building, calling into question whether the impact of the trillion USD of new credit that was created in the first quarter is already starting to wane. Specifically, copper is starting to roll over again (chart 1), rebar (the newly anointed proxy for Chinese state directed finance and infrastructure investment) has made a sharp reversal (chart 2), and the CSI 300 Index appears to be on pace to test the February lows (chart 3).

In economic news, FX reserves were basically flat MoM in April, but after accounting for currency valuation effects FX reserves showed another outflow. Indeed, chart 4 below which converts Chinese FX reserves into units of the Chinese Foreign Exchange Trade System units (CFETS), was modestly lower again for the 6th month in a row. Meanwhile, imports from Hong Kong in April (aka foreign subsidiary over invoicing the local holding company in order to allow capital to exit the Mainland) surged by 203% YoY suggesting massive capital flight (chart 5).

All the above argues strongly that the incredible new credit creation in the first quarter may not be having the desired, long-term impact that it was intended to have. If that is indeed the case then we would not be surprised in the least to see worries of slower Chinese growth and currency devaluation to resurface in the weeks and months ahead.

Pic1pic2pic3

Pic4

pic5

Sign up for reports from Gavekal Capital