Don't fight the Fed is a well-worn rule for global markets. Don't underestimate the Chinese Communist Party should be another.
Confidence in the ruling party's ability to pilot the world's third-largest economy to a soft landing took a knock on Thursday after a set of surprisingly weak data for June.
Industrial production growth in particular badly undershot market forecasts. Gross domestic product for the second quarter, up 10.3 percent from a year earlier, was also on the soft side.
Global investors, already worried about weakness in the United States, were unnerved. But the reaction of most China-watchers was that the government would act promptly if needed to guarantee the growth that, ultimately, underpins the party's political legitimacy.
At the very least, many said, further tightening was unlikely.
Glenn Maguire, chief Asian economist with Societe Generale in Hong Kong, said Beijing would resume a stimulative stance if it became clear that the economy was swooning through the summer.
"Though it looks to be a bumpy ride, we retain our confidence that China will average 10 percent growth this year. The clear communication of an expansionary policy affirms China's conviction to reach that same goal," he said in a report.
Maguire was referring to a front-page editorial in the official China Securities Journal calling for the government to eschew further tightening because of weakening growth prospects.
"With the inventory cycle heading into a small de-stocking phase and the overseas economy slowing, the range of the slowdown will possibly surpass expectations," the paper said on Thursday.
Much rides on Beijing's policymakers making the right call.
China last year became the leading trade partner of Brazil, India and South Africa. Demand from the Middle Kingdom is a driving force behind Germany's V-shaped industrial revival.
"The cargo business is currently absolutely booming. For the first time in over 10 years we are seeing not just strong imports out of China, but also strong exports to China," Stephan Gemkow, the finance chief of German airline Lufthansa (LHAG.DE: Quote, Profile, Research, Stock Buzz), told Reuters Insider television on Monday.
In Asia, the strongest growth in exports from South Korea and Taiwan this year has been to China. The biggest increase in Singapore's tourist arrivals in May was from China, said Rob Subbaraman, Nomura's chief Asian economist in Hong Kong.
"Undeniably China has become a lot more important for the rest of Asia. Before the Asian crisis 15 years ago we used to rely on Japan, but now we're a lot more dependent on China," Subbaraman said.
"The view used to be that China was just buying commodities from Australia and maybe Indonesia. Now it's also capital goods from Japan and Korea and it's consumer electronics from Taiwan, Singapore and Japan," he added.
Beijing has plenty of choices if it wants to ease policy. The quickest-acting option would be to let banks lend more briskly.
Qing Wang, Morgan Stanley's chief China economist based in Hong Kong, said he attached a high degree of probability that the 7.5 trillion yuan target for bank lending this year, down from last year's anti-crisis record of 9.6 trillion yuan, could be revised up by early in the fourth quarter.
Stephen Green, Standard Chartered's chief China economist in Shanghai, also expects some sort of loosening next quarter.
This might take the form of more infrastructure and investment project approvals, some loosening of real-estate curbs and more central government budget spending on education, health and low-income housing.
For the moment, Green noted, the government is not showing any signs of panic. The spokesman for the National Bureau of Statistics made a point of noting on Thursday that GDP growth remained in line with the average of the past decade and was well within Beijing's comfort zone.
But Green said memories were fresh of 2008, when the government did not move to significantly loosen policy until after September. Then it was too late. "This time, we sense that the State Council will not want to be behind the curve," he said.
Indeed, Qian Wang and Grace Ng at J.P. Morgan believe Beijing has already flagged its policy bias with an announcement last week of an extra 23 major infrastructure projects for western China at a cost of 682 billion yuan ($100 billion).
"Although we believe the direct impact on the economy from the investment program is likely to be very limited in 2010, the initiative is an important signal that the government remains vigilant in setting policies that deliver solid growth," they said in a note to clients.
One thing is for sure: the government can afford it.
In contrast to the deep-red ink discoloring western public finances, Chinese data released on Thursday pointed to a budget surplus of 953.8 billion yuan in the first half of the year -- equivalent to 2.8 percent of last year's GDP.
So the Communist Party can keep the show on the road. Markets would probably breathe more easily.
But, in doing so, some say, the party would be merely masking fundamental shortcomings in China's economic structure that make pump-priming necessary in the first place.
"A relapse into policy stimulus should allow the government to avoid a hard landing. But it will also underline that China's challenge of generating strong and sustainable domestic demand growth remains unresolved," Mark Williams, who watches China for Capital Economics in London, said in a report.
Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong agreed.
"The government's ability to cushion growth below 8 percent with fiscal stimulus is still considerable, if unwanted. A slower growth rate, accompanied by more aggressive economic reform, remains the more optimal outcome," he said.
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