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Quick Thought Of The Week: Rebound

The market wasn’t quite expecting that.

Surprisingly encouraging news of strong Chinese manufacturing activity in March coursed like a wonder drug through the arteries of global markets at the start of the second quarter of 2019.

It was the first increase in manufacturing activity in four months. It was also the strongest increase since July 2018.

But that’s not all. Employment increased for the first time since October 2013. Some Chinense firms even mentioned that they were hiring additional workers to cope with the increase in orders.

And there’s more….

… China’s services sector expanded more than economists had expected in March. It was the strongest pace of expansion sector since 2018.

It’s hard to not get swept away by the euphoria of China’s economic rebound. Any improvement in activity in the world’s second-largest economy could have a positive impact on the rest of the world, especially countries that dig stuff out from the ground.

This is Quantitative Easing with a Chinese twist.

In January, the People’s Bank of China cut the amount of cash that banks must hold in reserve for the fifth time in a year.

Apart from the triple-R cut, there are more easing measures in the pipeline with cuts in taxes and other fees, and a reduction in valued-added tax for construction and construction sectors.

The good news is that this could stimulate economic activity, as China tries to avoid a hard landing. That could be good news for consumer-facing businesses In China.

But there’s something else…

…. China marches to the beat of a differ drummer. It sees subsidies to state-owned enterprises as a legitimate way to maintain economic stability. More people in work – even if they are not adding to overall productivity – is good for the state.

This is QE the Chinese way.

It solves an immediate problem of a slowdown in economic growth. Heavily-indebted state-owned enterprises could get a stay of execution. But it also means a bigger problem that needs to be addressed later.

A version of this article first appeared in Stock Advisor.

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