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

31 Aug 2015 | Author: | No comments yet »

China is growing at ‘reasonable’ pace despite pressures, says Premier Li.

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.

The Chicago Board of Exchange (CBOE) Volatility Index (VIX) jumped to its highest level in more than six and a half years last Monday following a broad early morning stock sell-off, triggered by the Chinese stock market plunge. 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. Billions were wiped off the value off British pension funds and savers’ investment pots last week as fears of a slowdown in China tore through global financial markets. 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.

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. 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 South African rand touched a record low of just above R14 to the US$, triggering the SA Reserve Bank to issue a statement to the effect that the bank may consider “becoming involved in foreign exchange markets to ensure orderly market conditions”, that is effectively, to intervene to save the rand. However, central bank intervention in foreign currency markets usually runs out of steam if the exodus of foreign capital is sustained and as such, can only work as a short-term measure. China’s economy, which has been experiencing decades of impressive economic growth on the back of massive industrialisation and urbanisation, has been showing signs of faltering. Disappointing economic data which suggested that China’s industrial activity is slowing sharply could have triggered the market rout and investors voted with their feet.

The world’s economic growth has now become dependent on China, India and the United States, which combined, contribute at least 80% of the global growth. For now, the markets are assessing the Chinese authority’s actions, but China faltering economic growth still remains the fundamental challenge facing global economic growth.

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