The China down shift

Chinese authorities in indeterminate state, next stop, a rank adjustment. SocGen reports:

The French bank has told clients to hedge against the danger of a blow-off spike in Chinese growth over coming months that will push commodity prices much higher, followed by a sudden reversal as China slams on the brakes.

In a report entitled The Dragon which played with fire, the bank's global team said China had carried out its own version of "quantitative easing", cranking up credit by 20 trillion (£1.9 trillion) or 50pc of GDP over the past two years. It has waited too long to drain excess stimulus.

"Policy makers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points," said the report, by Alain Bokobza, Glenn Maguire and Wei Yao.

The Politiburo may be tempted to put off hard decisions until the leadership transition in 2012 is safe. "The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation," it said.

HT Mish

Let me add 1) The Baltic Dry Index is way down recently, due to the Chinese export slowdown. 2) When the Taylor rule goes negative, that is the crash. 3) Right now the inflation rate is due to skew, heteroskedacity in the economy as the debt spirals trace back up the over investment spirals, except the trace back comes with a higher order Fibonacci, and goes much faster.

There will be Wyle E. Coyote moments, but this rank reduction is not a large fall, they should avoid a second dip, the second is worse.