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China’s Economy: Policy Stimulus in Action

Giordano Lombardo
calender-icon Posted on July 27, 2012

Investors welcomed the news when China’s recent GDP data confirmed a downward trend in growth.

I asked Pioneer’s Head of Emerging Markets, Mauro Ratto, to summarize his thoughts on the data and its implications for our clients. In response, he wrote an informative summary, which we’ve posted to our web site. I’ve included a few of the highlights here . . .

  • We don’t believe China’s recent GDP data supports a scenario of a “hard landing.”  The slowdown still looks moderate compared to what happened in 2008, and Chinese officials appear ready to step up their expansionary policies both on the monetary and fiscal side.
  • That said, The People’s Bank of China (PBOC) has focused on stimulating economic growth since last year, due to concerns about slowing economies in Europe and the U.S. We think it was timely enough to switch policy after focusing on fighting inflation for about two years. The second-quarter GDP report came on the heels of a rate cut fully consistent with this new policy, which is likely to proceed apace, as risk scenarios such as the EMU debt crisis remain a threat.

Admittedly, the Chinese economy is not threatened by a conventional recession (meaning GDP shrinkage). But a sharp slowdown would seriously hurt other economies and would not be welcomed by a political class that is going through a generational change.

The Work is Barely Half-Finished

  • Rate cuts are thus poised to continue and they may not be the only tools available to revive the credit market and give the economy a boost. The PBOC has been lowering the banks’ reserve ratio well before starting to cut rates.
  • Close attention will be paid to manufacturing indices, which are closely related to the global economy.

Last week’s positive reaction to Chinese data was probably favored by positive evidence on corporate earnings, notably by a leading bank such as JP Morgan, which reported good second-quarter earnings thanks to reviving lending to businesses and this should be a sign of a buoyant economy.


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