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“We will improve policies that encourage consumption.”

– Wen Jiabao

Let me ask: what have China’s central planners now admitted is integral in supporting sustainable Chinese economic growth?  

  1. New emphasis on consumption-led growth to rebalance the lopsidedness of investment growth that’s currently compensating for softer export growth

  2. The need to cool speculative bubbles within the economy so as to reduce the inflationary pressures and manage social perceptions

I agree. But easier said than done, of course.  

We talk a lot about why the shift to sufficient levels of consumption will be tough for China to achieve with any efficiency. Basically, the consumer faces pressures from inflation and redirected capital flows, from the central government to local government investment projects, which prop up the current system, despite the need for a shift.  

Amidst the puzzle pieces China is using to put together an economic rebalancing, commentators have sought to expose the main obstacles to achieving that goal. Real estate is certainly among the largest obstacles. It is certainly worth watching.  

While we don’t get as much bubble talk as we once did, China’s housing situation is still fragile … and it is still an important piece in China’s economy.  

It is among the reasons we see comments from the Chinese Premier today regarding a revised growth target lower than the all-important 8% level, a need to stem rising home prices, a commitment to making credit accessible, and:  

He also said the government would defuse rising local government debt, regarded by many investors as the key risk to fiscal sustainability. Government figures show about 10.7 trillion yuan ($1.7 trillion) was owed by local governments at the end of 2010.  

That was from Reuters. So is this:  

China’s big four state-backed banks will lend more to qualified property developers to boost entry level housing supply, a statement in the central bank’s newspaper on Friday said, a signal that they are ready to ratchet up real estate lending.


According to the statement published on the front page of Financial News, a paper run by the People’s Bank of China, the big four banks “will proactively support qualified property developers to develop common commercial housing that is in demand to boost effective supply of common commercial housing.”  

There are a lot of conflicting winds blowing through the Chinese economy. Some measures may achieve their intended goal; but much of the policy jawboning amounts to setting perceptions, conveying to the public just what Chinese officials want its people, and investors, to expect.  

When it comes to China’s revised GDP target, it’s anticipated that they are just setting the bar low so they look better once they clear it. Until now 8% marked the floor at which China believed it could achieve growth necessary to keep social concern from boiling over.  

Apparently lowering the growth target offers policymakers room to reform the system and encourage businesses all at the same time. Reuters:  

Lower growth will allow Beijing to reform key price controls without causing an inflation spike, so monetary policy can stay broadly expansionary to ensure a steady flow of credit to the small and medium-sized firms the government wants to encourage.  

In a nutshell, that’s the familiar stop-and-go policymaking Chinese officials have become known for over the last 4 years.  

China has succeeded in recent months to bring inflation down. And CPI out later this week will probably reveal prices are stable around 4%. This opens the window for China to take supportive action aimed at growth numbers, and they know it.  

But one has to wonder if this is China last chance to dance. Besides the internal risks to growth, China continues to tug with a Europe that’s heading into recession and a US that’s fighting to stay above water. If they are able to stabilize investor expectations, their efforts could be supportive for markets through to the end of Q2 or into Q3 assuming there is not some inescapable external shock.  

The Shanghai Composite Index began reflecting the Chinese growth downturn back in the second quarter of 2011; it has since rallied back in 2012. But will we see Chinese stocks foreshadow a renewed downturn in the Chinese economy that is deep enough to disappoint?        

We might get some near-term selling that is technical in nature. But as I said, China is working overtime to keep things going. That may mean it is still a couple more months before we see real fallout in Chinese stocks and global risk appetite.  

For good measures, here is the Shanghai Composite and the S&P 500:  

Seems like some sort of correction is due.