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If China’s stock market performance is of utmost concern to Chinese officials, then I guess you can’t blame them.
After all, the underperformance of Chinese shares relative to U.S. shares is obvious, as you can see in the chart below.
Still, you have to wonder about local Chinese governments recently unveiling more than $1 trillion of new stimulus.
When half the globe is analyzing every word out of German Chancellor Angela Merkel’s mouth … and the other half is doing the same of Ben Bernanke … that doesn’t leave many to analyze Chinese policy.
Commentators and analysts have mostly been able to shrug off China’s economic troubles. They’d rather assume a typical second-half recovery that silences the bears, much like we’ve seen in the last three years, despite:
- Second-quarter GDP growth of 7.6% is well-shy of the 8.1% hit in the first quarter.
- Chinese industrial companies’ profits fell 2.7% in the first seven months of 2012, a far cry from the 28.3% rise in the same period last year.
- The HSBC China Manufacturing PMI contracted further in August, to its lowest since March 2009, showing sharp declines in exports, production and new orders
But with the new announcements of regional stimulus, it’s almost as if China is putting the spotlight back on itself. Perhaps it has no choice.
China has been struggling — no question about that. So there was little doubt Chinese officials would do something. The only questions were what and how.
Beyond the interest rate and reserve requirement ratio cuts, new infrastructure plans were pretty much a given. Additionally, Barclays Capital has noted some projects are “aimed at boosting China’s technological capabilities and its domestic consumption.”
That would be refreshing, since devotion to infrastructure in the 2008-‘09 stimulus led to speculative consequences.
By launching these projects, China creates new demand for credit, new demand for resources, and spurs new production. They’ve perfected that strategy and continue to rely on it, even though its effectiveness is waning.
Until now, China was doing this under the radar. But the latest announcement puts the proverbial bazooka in plain sight.
The New Stimulus Goal:
Shock and Awe Investors!
Let’s assume a less-conspicuous path to stimulating the economy wouldn’t have been enough, and an aggressive appearance is needed.
Why?
China hopes to continue their preferred growth model long enough to improve the numbers. This would convince investors that China is guaranteed to regain speed in the second half of the year.
One thing is crucial here: Impact potential.
Would a less-conspicuous stimulus have positively impacted global investors’ sentiment enough? Maybe. But what about Chinese sentiment? Now that’s a tougher question.
Despite the strides China’s economy has made in the last decade or two …
Chinese Officials Work to Maintain
an Unshakeable Grip on Social Mood
The government’s ultimate influence on economic trends gets brushed under the rug by outsiders. And many insiders with a vested interest in touting the Chinese investment story do the same. But managing social mood is still hugely important to China’s central planners.
The following are some points made by Andy Xie, former chief Asia-Pacific analyst at Morgan Stanley, writing for Caixin Online:
- Recent measures from policymakers “have small economic effects and seem designed to achieve a large psychological impact.”
- “The frequent and marginal policy changes could be construed as a lack of will to address the real economic problem: An excessively large and inefficient government sector.”
- “Playing psychology is effective in a bubble economy. When the bubble bursts, it only worsens fears.”
- “The rising [income] inequality is due to asset bubbles and gray income. Both are due to rapidly rising money supply that has increased government’s role in the economy and fueled asset bubbles.”
- “China has relied on quantity expansion to sustain economic growth for a decade. This model was stretched by borrowing from the future: Excessive use of worker overtime, high debts for financing, ignoring the environment to cut costs, relying on asset bubbles for profits and government revenues, and overexploitation of natural resources. There is only one resource left to sustain growth in the future: The productivity of Chinese workers.”
Income inequality and inflation are just two points of contention. Consider the pace of wage growth, private property disputes, artificially low deposit rates — these also create tensions that influence the perceptions of policy and the economy.
Maybe all this is why …
Flashing the $1.2 Trillion
Bazooka Makes Sense
You just have to wonder whether the cumulative $1.2 trillion number being tossed around is too much.
It may satisfy those betting on a second-half comeback. But $1.2 trillion is nearly 90% larger than the $635 billion unleashed on the economy after the global credit crunch. It screams of speculative excesses.
Steps need to be taken to change the role of government in the Chinese economy. Anything less will have little impact in the long-run. It seems this stimulus is merely distraction propaganda.
Chinese Premier Wen Jiabao is making the rounds to help rev up the export industry. From Bloomberg:
“The most important thing right now and the purpose of Wen’s trips is to reboot the confidence of businesses and focus more on employment,” said Helen Qiao, chief China economist with Morgan Stanley in Hong Kong.
“We’ve seen a significant deterioration in exports and the government really has very few tools to stimulate external demand, but it’s an important gesture that the government shows it’s trying to help.”
Wen has noted the importance of the third quarter for reaching full-year export growth targets. And that leads me back to this quote from Zheng Xinli, vice chairman of China Centre for International Economic Exchanges:
“If China’s economy does not bottom out in the third quarter, it would be hopeless to make it happen in the fourth quarter and we might miss the annual growth target of 7.5 percent.”
Is China Desperate?
China’s campaign to boost investor confidence is firing on all cylinders now. But the outlook for Chinese markets and commodities is not good. So as China’s economy grinds lower, I bring this up today wondering if the timing is detrimental for world-wide risk appetite …
If Ben Bernanke disappoints investors at Jackson Hole, and Angela Merkel doesn’t embrace fiscal integration, and if the Troika doesn’t let up on Greece … what happens if the outlook for China actually does not improve soon?
Best wishes,
JR
