Chinese excess liquidity does a good job of leading asset prices as well as China-related commodities. We define excess liquidity as M1 money growth minus Inflation minus economic growth. This captures how much excess money there is beyond what the real economy can absorb. The ups and downs of excess liquidity provide a good lead on Chinese house prices as well as China related commodities such as iron ore. (Click on images to enlarge.)
We are not turning very negative cyclically on China yet. We are very negative due to structural reasons, but rising liquidity has boosted our leading indicators. If our indicators turn down much more sharply, we’ll keep clients informed. Firms heavily exposed to China are likely to fare badly when this happens.