China's Phantom Slowdown

As the author has travelled the world over the last 10 days, three things have become all too apparent to us. Firstly, growth and indeed inflation expectations are a little higher in Asia than they are in Europe, although even in Asia very few people are yet talking of the danger of overheating.

Secondly, although the ‘consensus’ of opinion is that global trends are not too far away from some perceived ideal ‘Goldilocks Scenario’, many portfolio managers are currently holding elevated levels of cash or insuring their portfolios, ostensibly because they fear the consequences of an unwinding of the central bank’s extraordinary policy measures (“Q-exit”). However, we have also noted that there has been relatively little ‘hard’ analysis of this particular topic.

Finally, we note that almost everyone has accepted the ‘moderate / gentle / controlled / centrally planned slowdown scenario in mind for China’s economy..

Perhaps rather naughtily, we have been passed a number of reports on China from a variety of sources as we have been travelling but virtually all of these reports have referenced the idea that China is slowing as a result of weaker credit, central direction and the impact of pollution controls. None of these reports has however referred to inflation in anything more than a very superficial way – even those that have noted the behaviour of the seemingly permanently component series….