Optimism in China returns all of a sudden after a series of economic figures in trade and inflation surprised on the upside. Two months ago, the market was pessimistic and thought the China economy was about to collapse. The swiftly changing sentiment of the market in response to high frequency data releases does not offer a holistic perspective to understand the current state of affairs. We reckon economic growth will likely stabilize at around 7.5 percent for the rest of the year but it is hard to call for a sustainable V-shape rebound.

The philosophy of macroeconomic management nowadays is to buttress a bottom-line threshold for economic growth instead of aiming for rapid rebound. Macroeconomic policy is prudent and fiscal response is sporadic. The reserve requirement ratio stays at a historical high. There is already a strong upward bias attached to domestic interest rates after mini liquidity crisis in June alongside the quickening pace of interest rate liberalization. There are inadequate policy catalysts to drive a sustainable rebound.

Maintaining the status quo is thus the dominant strategy. There is nothing China can do until the National Audit Office is finished with assessing the latest level of local government debt. Policymakers neither afford to over stimulate the economy, nor can they allow the economy to sink further. At the same time, they cannot prick the property market bubble. In fact, both land and property prices have continued to march north in spite of the presence of austerity measures.

The low reading of the Consumer Price Index at 2.6 percent in August alongside the slower descend of the Producer Price Index thus means nothing to monetary policy. If they do, the People’s Bank of China would have started cutting interest rates awhile ago. The present macroeconomic environment is much different from the late-90s when conventional Keynesian and Monetarist approaches could be applied aptly. Not this round. We will see even more peculiar macroeconomic phenomenon soon down the pipeline. The emergence of “inflation duality” beginning early 2014 is fairly likely. This means we will soon see disinflation in the physical product market, yet asset inflation will keep rising in the housing market.