Wednesday, May 30, 2012

China Calls the Stimulus Bluff

Through their press agency, China's government called the bluff.

Rumored stimulus has not been true. Maybe not yet.

From Bloomberg, (bold highlights added)

China has no plan to introduce stimulus measures to support growth on the scale unleashed during the depths of the global credit crisis in 2008 according to the nation’s state-run Xinhua News Agency.

“The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,” Xinhua said yesterday in the seventh paragraph of an article on economic policy, without attributing the information. “Current efforts for stabilizing growth will not repeat the old way of three years ago.” In 2008, policy makers unveiled a fiscal stimulus of 4 trillion yuan ($586 billion at the time).

Any restraint on stimulus this time may reflect concern the record lending boom that helped China weather a contraction in trade in 2008-2009 raised the risk of a bad-loan crisis. While Premier Wen Jiabao’s call last week for a greater focus on growth was endorsed by the State Council, or cabinet, it left out his recommendation to expand credit.

“The State Council is introducing a measured but still significant set of stimulus measures, which should begin to affect growth in August-September,” Standard Chartered Plc economists led by Stephen Green in Hong Kong wrote in a note to clients this week. Concern that a surge in credit would lead to faster inflation and higher property prices will be reflected in “a much more controlled pace of bank lending,” they wrote.

Yesterday’s Xinhua article made no mention of central bank tools including interest rates and the reserve-requirement ratio, previously used to bolster growth. It carried the byline of two reporters and wasn’t labeled as opinion or commentary.

‘Not Sustainable’

Pumping in government money to achieve growth targets is “not sustainable” and China will instead focus on encouraging private investments in railways, infrastructure, energy, telecommunications, health care and education, the story said.

As I pointed out yesterday

Rumors are one thing. Real actions are more important.

If there any lesson to glean from this event, such represents as manifestations of financial market’s deeply seated addiction to government steroids.

Yet the above developments partly or partially validates my suspicions about China’s evolving political spectrum: note "encouraging private investments".

Here is what I wrote last Sunday,

The bottom line is that should this be the case where there will not be material interventions, then economic uncertainty will be exacerbated by political uncertainty which increases the probability of further deterioration of China’s bubble economy.

Yet while the PBoC may likely engage in policies similar to her Western central bankers peers where inflationism has signified as an enshrined creed, it is unclear up to what degree the PBoC will be willing get exposed. That’s because China has made public her plans to make her currency, the yuan, compete with the US dollar as the world’s foreign currency reserve, which is why she has been taking steps to liberalize her capital markets and China has also taken a direct bilateral financing trade route with Japan, which seems to have been designed as insurance against burgeoning currency risks and from the risks of trade dislocations from potential bank runs. It is important to point out that the US has some exposure on major European nations.

Further speculations and rumors have it that China covertly plans to even issue a Gold backed currency as part of her quest to attain a foreign currency reserve status.

In short, the path towards foreign currency reserve status means having to embrace a deeper market economy (laissez faire capitalism) from which boom bust policies runs to the contrary.

Events are turning out to be very fluid. Rumors may turn out to be false. Denials can become real events. Anything can or might happen.

Today’s big surge could be tomorrow’s slump. There has been NO clarity yet on geopolitics (China, EU or the US) and of policy directions mostly by central bankers. This is a period characterized by high uncertainty.

Be very careful out there.

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