It’s the nature of financial news media — they have to look for explanations; they have to find reasons; and they have to be first to break the news.
And that’s some of why most of the news that moves markets does so in a short-term feedback loop sort of way. Take this top-of-the-page headline from Reuters this morning:
So what were China’s moves that so convincingly impacted markets?
According to the article, “Local media in China reported the government was looking to increase investment in railway projects to reduce gluts in steel, cement and other materials as it aims to ensure annual economic growth does not sink below 7 percent.”
Now actually take a moment to think about it, which Reuters obviously didn’t do (or if they did they didn’t care that their conclusion doesn’t make a whole lot of sense.) But I suppose what matters is what traders and investors think about the news.
Here’s what I think:
China is facing a very real credit market dilemma. And they openly recognize the growing risks of perpetuating their investment-led growth model of recent years. Yet they come out now and claim investment can further prop up economic growth and help China avoid a hard-landing.
Maybe in the short-term. Maybe if they create artificial demand for certain commodities and materials by promising railroad projects. Maybe if prices of these commodities and materials don’t fall further, maybe China can convey a sense of economic recovery.
It’s the same modus operandi. And maybe that way of operating still has some life left.
I tend to think it doesn’t. The game is old hat now. And the global environment is clearly not in a position that will allow it to drive new, meaningful Chinese growth.
Finally, the comments in the Reuters article also imply that GDP could reasonably be expected to fall below 7% if China doesn’t take some kind of action … even if it is the kind of action they’ve become reluctant to take because the risks of investment bubbles and credit troubles is growing rapidly, right?
Please excuse me if I’m completely missing something here. But as someone who follows the markets every day, I find nothing reassuring about China’s talked-about “moves.”
But then again, what I find only matters if most of everyone else in the market finds it too.
Perhaps if Reuters instead put this article at the top of their homepage (I found it in small print at the bottom!) the market would find little reason to cheer today. Here is an excerpt:
The bank measures come as China’s cabinet said this month it would cut off credit to force consolidation in industries plagued with overcapacity. This was shortly after China Rongsheng Heavy Industries Group, the country’s largest private shipbuilder, fell into financial turmoil.
Beijing did not specify then the industries it had in mind, though in 2009 it named nine, including shipbuilding. Industry sources said neither the banking regulator nor any central government agency had issued new rules on tightening lending to shipyards or other industries.
That’s just one example of the changing credit and lending environment across China. Creating artificle demand in some industries (e.g. housing, railroads) can only compensate for lost growth in other areas for so long.
Will the 7% threshhold be tested this year? Or will China be able to evade major risks even longer?
The mood has generally improved recently. But that, of course, lays the groundwork for disappointment.