China’s problem is the economy itself, not the market sell-off

31 Aug 2015 | Author: | No comments yet »

3 reasons markets lost faith in China’s economy, at a glance.

For decades, Chinese economic policymakers have drawn praise for keeping their economy growing strongly through turbulence, such as the Asian financial crisis of 1997-1998 and the worldwide financial tumult of 2008. WASHINGTON (AP) — The fear that gripped financial markets this month is a stark one: That China’s economy might be slipping into a decline that could persist for years.

LONDON (Reuters) – Fears over the health of the Chinese economy kept world markets on edge last week and China country will remain in focus, along with the question of whether the Federal Reserve will raise interest rates next month.BEIJING — China’s economy is growing at a “reasonable” pace and, despite growing pressure, the government can handle well the risks the country faces, Chinese Premier Li Keqiang said. Li said international market instability “has increased the uncertainties around the global economic recovery, and the impact on China’s financial market and imports and exports has also deepened, with the economy facing new pressure.” He defended China’s efforts to steer through a volatile period since mid-June, when China’s stock market plunged. Markets will therefore be watching business surveys, factory orders and trade data from the world’s largest economy as well as the employment numbers due on Friday. “The week finishes with non-farm payrolls for August, typically the biggest market mover globally, and definitely on the Fed’s radar given unemployment is already close to full employment and the Fed looking to gauge whether there is `some’ further labour market improvement,” economists at National Australia Bank said. State-run media talked up stocks, and individual investors responded by buying shares and igniting a 150 percent run-up in the Shanghai Composite stock index in the year through June.

That step, in part an effort to align the yuan with market forces, was also seen by investors as a desperate bid to fuel exports in a faltering economy. Li said recent cuts in the reserve requirement ratio (RRR), interest rates, taxes and fees and measures aimed at stabilizing the market were already paying off.

The government sought futilely to intervene, suspending trading in hundreds of companies and banning big investors from selling stakes for six months. For 2015, while the nearly healthy U.S. economy will expand perhaps 2.5 percent, even most pessimistic analysts predict that China’s will grow at least 5 percent . Li said China would “enact more targeted and responsive macro-regulation to offset downward economic pressure, more robust reform and innovation efforts to energize the market, and more effective delivery to secure the positive momentum for growth”. The European Central Bank is expected to keep a steady hand when it meets on Thursday, days after data are likely to show there is still very little inflation in the currency bloc. He said China needed to encourage new forms of investment and financing by local governments and businesses, such as local debt swaps and corporate bonds.

The skepticism is rising just as China is pursuing one of the most daunting transitions in modern economic history — from overheated growth, driven by exports and often-wasteful investment, toward slower and sturdier growth fueled by spending from an emerging middle class. Almost half a year since the ECB started pumping 60 billion euros a month of fresh cash into the economy, annual inflation data, due on Monday, will probably still show prices rose only 0.1 percent in August – nowhere near the bank’s 2 percent target ceiling. There is a growing chance the ECB will extend its stimulus programme beyond the planned completion in September 2016, and if inflation data misses expectations that likelihood will only increase. The hope was that Chinese companies could issue shares into a rising market and use the proceeds to finance growth and shrink their heavy debt levels.

Since the devaluation, China has intervened to keep the yuan from falling too fast, confusing markets and renewing doubts about Beijing’s commitment to market forces. The official unemployment rate is laughable: It’s remained between 4 percent and 4.25 percent — and almost always precisely 4.1 percent — every quarter for the past five years, according to Trading Economics. After the global financial crisis in 2008, for instance, they enacted a stimulus program — spending on roads and other infrastructure and ordering state-owned banks to lend freely. Yet the stimulus came at the cost of a surge in debt: McKinsey & Co. says China’s public and private debt quadrupled to $28 trillion in 2014 from $7 trillion in 2007.

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