We issued the first warning notice last December, in a post whose title said it all: “Global Deflation Alert: Chinese Credit Creation Tumbles To 27 Month Low.” It showed the chart which we – and UBS – have argued is the only one that truly matters for global inflation (or deflation): China’s credit impulse.
We followed it up two months later in February with “The Deflationary Canary: China Tier-1 Home Prices Post First Decline Since May 2015” in which we that as as result of the ongoing slide in the credit impulse, “expect further downside to home prices, not only in Tier 1 cities, but across the entire Chinese housing market” and added that “the last two time China’s housing contracted, the result was a deflationary wave unleashed across the globe; in fact some have speculated that the reason for the near-bear market in late 2015 and 2016 as well as the Fed’s derailed plans to hike rates in 2015 was largely due to the deflationary spark prompted by the sharp contraction in Chinese housing prices.” In short: deflation, and poor economic data was about to spread across the globe.
Incidentally that was precisely the time the global economic surprise index tumbled, and prompted economist and analysts to ask if the “global coordinated recovery” is now over.
Then, just last week, we hammered it home again with “It All Begins And Ends With China: “Is The Global Reflation Cycle Ending?” in which we focused on the sharp decline in Chinese economic data, and arguing that the credit slump has finally caught up with the economy, and warning that the result would be a deflationary shockwave soon to be unleashed around the globe.
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Fast forward to today when the “China problem” just made it mainstream thanks to an observations by Citi which this morning points out something and warns that “This is not a healthy chart.“
The chart Citi refers to is the 5Y China government bond yield…
… and adds the following:
Back in November the PBoC introduced what some have termed ‘Yield Curve Control With Chinese Characteristics’ when the yield threaten to break hard above 4%, involving the provision of extra liquidity and other measures. Since then yields have collapsed hard across the curve.
While some of the rally is likely driven by inflows seeking a home in the CGB market ahead of global indexation, the experience of other countries pre-indexation showed a very different trajectory from this.
Citi’s conclusion, incidentally, is precisely what we warned back in December, and then again in February, and then again last week:
“The bond market may well be signaling a very unhealthy period ahead for Chinese growth. The small RRR cut does not account for the move either. Copper, CLP and AUD are all vulnerable if the China slowdown thesis is correct.”
Needless to say, if China is indeed about to undergo a “very unhealthy period“, global growth is about to collapse, and deflation is about to take hold. Which we bring up only to help those on the fence about buying today’s breakout in 10Y yields: if China is indeed the harbinger, it is more likely that 10Y yields slide back to 2% than make the 8bps move back up to 3%.