Rabobank: A Man Walks Into A Soviet Car Showroom…

Submitted by Michael Every of Rabobank

Chinese Q2 GDP was 11.5% q/q (vs. 9.6% expected) and 3.2% y/y, comfortably beating market expectations of a big swing back to growth: such bounce; so recovery; very GDP. So after a calamitous -6.8% y/y collapse in Q1, a Q2 surge that, credit expansion aside, is widely regarded as unspectacular on all other measures, and with about as negative an external environment as one can imagine, the Chinese economy is, right now, already officially larger in real terms than it was a year ago.

Meanwhile, industrial production was 4.8% y/y, in line with consensus, but retail sales -1.8% y/y vs. +0.5% consensus: one can see why there is a mad rush to produce so much with demand like that. Moreover, fixed investment y/y YTD was -3.1% vs. -3.2% consensus. At least property investment was up 1.9% y/y, double what was expected: that seems to be where all the output is going – another leg in the housing bubble (and the new equity bubble too.)

In short, that’s a semi-command economy for you. It reminds me of the infamous piece of tactical advice former Spurs manager Harry Redknapp gave to striker Roman Pavlyuchenko before he came on as a substitute – except in that case he scored the winning goal, and there is very little sign of that being achieved in China –or anywhere– in the new Covid normal.

Markets can keep playing along – for now (although Chinese stocks did not like a combo of stronger GDP, so less PBOC, and weaker retail spending). However, the Chinese data remind me of the inverse of an old joke about the Soviet economy, which could never keep supply matching consumer demand.

A man goes into the Soviet car showroom and asks to buy a car. The disinterested salesman doesn’t even put out his cigarette and says, “We only take 100% cash payments.” The man puts down a bag full of roubles on the table. The salesman sits up and counts them greedily.

“The only colour is grey,” he informs the customer as he counts.

“No problem,” the man replies. “When will it arrive?”

The salesman slowly looks through a dog-eared book and says “Mmm…….five years from today.”

The customer nods sagely; and then asks “Morning or afternoon?”

“What do you care morning or afternoon?” asks the salesman “It’s five years from now!”

“Well,” says the customer, “I am getting my fridge in the morning.”

One wonders how long until we get such biting jokes about how our current market economies try to keep up consumer demand with no real wage increases against a never-ending increase in global supply (and without realising it’s easier to do that inside a more national boundary line). The answer is, of course, a series of tragicomic asset bubbles, heedless of the fact that every time they burst they just make everything worse – including underlying socioeconomic stability. Ideologically-unrepentant former Soviet citizens out there will be chortling to themselves already. Yet central planning without a plan is not that funny for most of us.

Meanwhile, not moving the meme needle too far, the US is apparently weighing an executive order travel ban on the 90m members of the Chinese Communist Party (CCP). That is a huge escalation in geopolitical tensions, especially as one of the true jokes of our current global system is that while a Cold War rages, everyone knows a very large number of the CCP elite send their children to study or live in the US. Bloomberg also reports that President Trump weighed against imposing sanctions on Chinese officials when he signed the HK Autonomy Act on Tuesday – but that he had had Vice Premier Han Zheng, a member of the Politburo’s seven-man standing committee, in mind before pausing. That is how high the Act is potentially aiming.

Still talking of Soviet jokes, Australia’s always-dodgy labour force data leaped 210.8K in June – just before Victoria went back into a new lockdown. Unemployment nonetheless rose from 7.1% to 7.4%, worse than the 7.3% expected. Nearby, Kiwi CPI was -0.5% q/q (vs. -0.6% consensus) and down from 2.5% to 1.5% y/y (vs. -1.3% consensus). The RBA and RBNZ both face a Long March to ever raising rates again.