China attempts to walk the economic tightrope

Chinese President Xi Jinping has tried reassure investors that China’s economic fundamentals are sound. Photo: Thibault CamusPeter Martin: China gets it wrong​China’s economic growth slows

After a torrid few weeks on the financial markets prompted renewed doubts over its handling of the economy, this was the Chinese government’s attempt to reassert control of the narrative.

Official figures on Tuesday showed China’s economy expanded by 6.9 per cent last year – dead on expectations and in line with government targets.

Retail spending remained robust, struggling industrial production stabilised; property prices, in larger cities at least, have continued their tentative recovery, according to the data released on Tuesday.

Addressing an economic policy meeting on Monday, President Xi Jinping urged senior officials to “stabilise short-term growth”.

China’s long-term economic fundamentals, he said, remained sound, despite downward growth pressure and financial market volatility.

State media has been awash with reports dutifully projecting this resolute yet optimistic tone. World critical of government bungling

But to the world, China’s ham-fisted attempts to prop up its sharemarket and interfere with its currency have indelibly damaged its veneer as an institution with an economic Midas touch.

The embattled head of China’s securities regulator, Xiao Gang, has been widely blamed by investors for mishandling the recent market crisis. He championed a “circuit-breaker” to limit market losses which instead exacerbated the sell-off that wiped $US5 trillion ($7.25 trillion) off the value of China’s two largest stockmarkets.

A Reuters report, citing unnamed sources, said Xiao had offered to resign. Highlighting the government’s sensitivity to criticism on its handling of the economy, the securities regulator promptly denied the report and demanded a correction.

The news agency’s official Chinese-language Weibo account, with close to 800,000 followers, was swiftly suspended; its more than 50,000 previous posts instantly erased. (Its website, as with numerous other foreign news outlets, was already blocked by China’s internet firewall).

Xiao, for his part, blamed the market meltdown on just about everything: “an immature market, inexperienced investors, imperfect trading system, flawed market mechanisms and inappropriate supervision systems”.

Global sharemarkets react strongly to the volatility but will likely grow more accustomed to the downswings in what are still massively overpriced Chinese shares. High-wire act

But in the real economy, the attention remains squarely on how China continues its high-wire act of balancing its desire to prop up economic growth with stimulus and monetary easing (cutting interest rates), without inflating its credit bubble to irretrievable proportions.

Annual growth of 6.9 per cent is still China’s slowest since 1990. December quarter growth of 6.8 per cent, as well as a raft of other economic indicators, were also shy of consensus analyst expectations.

Many economists believe China’s true economic growth rate is considerably lower than official figures suggest.

Making matters even harder is the country’s increasingly divergent two-track economy. The nation’s construction and industrial sector – once the engine of the global commodities boom – continues to slow.

Steel- and coal-producing towns across China are in the doldrums, while reports of factory closures in the southern manufacturing hubs of Guangdong and Zhejiang proliferate.

Crude steel production has suffered its first yearly fall since 1981 amid weak demand and a massive supply glut.

Retail sales and services, meanwhile, are a rare bright spot and have surged to account for more than half of economic output for the first time.

But as one analyst put it, “coal miners do not become internet programmers overnight”.  Stimulus looks likely

To achieve this year’s target growth rate of about6.5 per cent, China will likely have to resort to more stimulus and monetary easing, though six interest rate cuts in the space of a year and an influx of infrastructure projects have thus far failed to have the desired impact.

Most worrying for economists in the medium-term is that the gap between credit growth versus nominal GDP growth, having been pegged back, has widened significantly towards the end of last year. It suggests less bang for each investment buck, and the dangerous inflation of China’s credit bubble.

Some of this has been attributed to increased capital flight from China to safer assets offshore. Anecdotal reports suggest Chinese authorities have tightened up on both legal and grey market cash transfer mechanisms as a result.

China will want to devalue its yuan further, both to boost its struggling exports while decoupling it from the US dollar and more to a basket of currencies. But it will be forced to think twice after just a modest adjustment earlier this month exacerbated market panic.

These conundrums have been present since China’s massive credit stimulus during the global financial crisis contributed to today’s overcapacity in housing and the industrial sector.

The difference from a few years ago is that every perceived misstep will be amplified by an increasingly watchful global investment community parched for good news and which is, now more than ever, trading on the fortunes of Chinese economic sentiment.

Philip Wen is China Correspondent for Fairfax Media.  

This story Administrator ready to work first appeared on 老域名购买.

Comments are closed.