Ignore China's Steep Yield Curve And Start Preparing For QE - Here's Why

With the world pre-occupied on the U.S. yield curve – which is flat and already heavily inverted – many are overlooking problems from the world’s third largest bond market.
I’m talking about China.
The Chinese economy has for a long-time used debt, currency manipulation, and shady banking practices to kick the can down the road.
But with the recent economic growth slowdown and on shore bond defaults – things are looking dire. Especially as global growth as a whole stalls.
As of now: short-term borrowing costs are too low – spurring a stock bubble. And long-term rates are too high – thanks to soaring government debt and record Chinese defaults.
To give you some perspective – Chinese stocks are up already over 20% in the last month alone (mainly from trade-war fears easing). All while the Chinese economy is decelerating.
So – putting it simply – the Chinese yield curve is steepening amid an economic slowdown (which doesn’t usually happen).
Yield curves traditionally steepen when the market’s expecting higher future growth. And they flatten/invert when slower growth is expected.
So what does this mean?
I gather two things from this:
First – that China’s yield curve doesn’t contain the sorts of signals found elsewhere. Meaning that the yield curve isn’t pricing in what’s really going on in China – an economic slowdown.
And Second – the Chinese officials are stuck between a rock and hard place and will... Read more