Tags: china | economic | growth | bubble

China Must Slow Growth to Avoid Inflating Bubble

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Tuesday, 05 March 2019 09:36 AM Current | Bio | Archive

China’s National People’s Congress, the country’s top legislature, has started its annual session today in Beijing, China.

This doesn’t really matter very much to anything of course, but according to Chinese Premier Li Keqiang’s annual government work report, China has set the target for its gross domestic product (GDP) growth at 6 percent to 6.5 percent for 2019. Last year the target was about 6.5 percent.

The ever excitable media are inclined to present this as a “cut” in the growth target with which I don’t agree as this could also be seen as a more realistic assessment of precision of the Chinese economic data.

Economists know that economic data is not precise and what happens after the decimal point is largely meaningless.

China’s official growth targets do matter to some extent because no statistician in China is likely to allow the published official growth number to be far from the official growth target, but then no one has really that much faith in the official numbers either.

In my opinion, the best way to interpret this is a recognition by the Chinese government that growth today remains “above” trend, probably around 5 percent, and it needs to keep slowing aggressively towards trend. Failure to slow could create a bubble and that would have unwelcome consequences.

A value-added tax (VAT) reform has also been announced that will reduce the current tax rate of 16 percent in the manufacturing sector to 13 percent and that will lower the rate in the transportation and construction sectors from 10 percent to 9 percent, and keep the lowest bracket rate unchanged at 6 percent.

That matters more than the GDP growth target in the real world and it signals that any slowdown in growth will be managed.

It might be of some interest to long-term investors that have interest in investing in China, taking note that China’s deficit for this year as a percentage of GDP is projected at 2.8 percent, which is 0.2 percentage point higher than last year. The government deficit is projected at 2.76 trillion Renminbi or Yuan (CNY) or about $411.5 billion.

The Chinese currency the Renminbi or Yuan (CNY) has remained practically unchanged at about 6.70 CNY per dollar after the report was released.

The dollar index DXY has remained a little above yesterday’s close at about 96.71 ate the moment of this writing (6:00 am NY time).

A number Fed and central bank speakers are on the agenda today although none of them is likely to really move financial markets.

In the U.S. we have Eric Rosengren President of the Boston Federal Reserve Bank and Neel Kashkari of the Minneapolis Federal Reserve Bank with both expected to give their view on the economic conditions in their respective states. It will be also interesting to hear if there is any recognition that the Fed’s favored inflation rate is just a rounding area below its target.

In the UK we’ll have Mark Carney, Governor of the Bank of England Carney who will testify before the House of Lords, but with key votes on the UK’s divorce from the European Union due in the British Parliament next week, there is really very little the UK government can say that financial markets don’t already know.

For investors it is noteworthy that the Bank of England is signaling monetary policy accommodation in the event of a disorderly exit from the European Union, but that is just common sense. Admittedly a signal that the Bank of England is applying common sense may be considered news by some people.

For now, the British pound quotes at around $1.32, which is practically unchanged from yesterday’s close.

From the Euro Area we got finally some positive news from the retail sector where In January, compared with December 2018, the seasonally adjusted volume of retail trade increased by 1.3 percent, the largest increase since November 2017. In January 2019, compared with January 2018, the calendar adjusted retail sales index increased by 2.2 percent in the Euro area.

For the moment, the euro quotes a fraction weaker against the dollar at around $1.13.

The weaker bias for the euro remains well in place. The ECB is expected to remain in “pause mode” on Thursday’s ECB Monetary Policy Setting meeting, while investors have practically priced out any up move in rates this year, which will increase the “divergence” for example with the U.S.

Around year-end I still expect the euro in the neighborhood of $1.11 per euro.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
In my opinion, the best way to interpret this is a recognition by the Chinese government that growth today remains “above” trend, probably around 5 percent, and it needs to keep slowing aggressively towards trend. Failure to slow could create a bubble and that would have unwelcome consequences.
china, economic, growth, bubble
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2019-36-05
Tuesday, 05 March 2019 09:36 AM
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