Wednesday, March 12, 2014

Xu Shaoshi says all is well with China's economy

China's propaganda machine went into full gear as it sets its sights on foreign economic forecasters who are continuing to profess slower economic growth for the nation. Is the West is picking on China again? Creating all this negative publicity?
People's Daily: - Among a number of foreign investment banks and international media, prophets of doom on the Chinese economy have begun to find their voices once more.

How should we view this negative publicity, and what is China's current economic situation? On March 5, Xu Shaoshi, head of the National Development and Reform Commission made clear that the Chinese economy has made a good start to the year and that future prospects are favorable. On the sidelines of the "two sessions" - the annual sessions of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC) - reporters interviewed NPC deputies and CPPCC members.
Are the Western analysts just "prophets of doom" hyping up the China-slowdown story? While a severe recession in China remains an unlikely outcome, there is no question we are seeing PRC face some serious headwinds.

First of all it is well known that many of China's insiders, analysts working for Chinese organizations, seem to be just as bearish on China's economic expansion as their counterparts abroad. Moreover, key economic data continue to indicate that growth is below expectations - see the latest export figures for example. And while one could debate the veracity of such data due to seasonal effects and other biases, it's harder to argue with the markets. Commodities that are sensitive to China's industrial demand, particularly iron ore (see chart), steel (see chart), and copper (chart below) have been hit unusually hard. Clearly something is wrong here.

China's authorities certainly have the wherewithal to stabilize growth through either fiscal or monetary stimulus. They've done it before. The central government however has been trying to wean the country from both in order to contain the buildup of market bubbles in areas such as wealth management ($6 trillion shadow banking balance sheet), corporate credit, and real estate. And if all was well with the nation's economy, Beijing would be staying the course here.

Lately however China's central bank has become quite accommodative. It stopped appreciating the yuan - in fact the currency has been allowed to depreciate (see chart) to help the nation's exporters. It is also allowing short term rates to decline. Some of that decline is due to falling demand, as banks pull back on lending into certain sectors. Partially it is the result of PBoC injecting liquidity via unsterilized dollar purchases (yuan sales). Whatever the case, the outcome is a sharp decline in interbank rates - a loosening monetary stance.

1-week and 2-week SHIBOR

One could debate the reasons for each of these trends. But taken as a whole, it is hard to argue that it is business as usual in China - even if Xu Shaoshi made it perfectly "clear that the Chinese economy has made a good start to the year and that future prospects are favorable."
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