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China's Economic Data Continue to Amuse, Mystify and Amaze

China's Economic Data Continue to Amuse, Mystify and Amaze

By    |   Wednesday, 19 October 2016 07:47 AM


China’s economic growth target is at about 6.7 percent. In Q3, China’s economy grew 6.7 percent. A little bit strange, isn't it?

The composition of growth continuous to shift in favor of more consumer led economics, which means that the growth rate is less relevant to the rest of the world, which is a point that investors should remember.

China is becoming more domestic focused in its growth, and with China growth at 6.7 percent, or at 7 percent, or at 6 percent, it doesn’t really make a huge difference outside of the borders of China, given the domestic nature of the growth dynamic.

Of course, it is absurd to even suggest that China growth is at 6.7 percent when the target is around 6.7 percent.

Is this sustainable? No, it is not!

Corporate China has to service US$18 trillion in debt, which is about the equivalent of 169 percent of the country’s GDP. That has forced the IMF to warn that China's credit growth has been “very fast” by global standards. The IMF explained that without a comprehensive strategy to tackle the debt overhang, there's growing risk it will have a banking crisis or sharply slower growth, and that Beijing should act quickly before the problem becomes systemic.

Investors must remember that China’s trend rate of growth is around 5 to 5.5 percent. Ultimately growing above that rate for any prolonged period of time, as is still the case, suggests the creation of bubble-like conditions.

In the U.S., we have the final presidential debate, moderated by Fox News. It is possible that the debate will have a high level discussion of policy proposals of economic significance.

It is also possible that China will fail to meet its growth target.

Just because something is possible doesn't mean that it's likely to happen.

Market attention has finally started to look at the Congressional races with some media speculation that the House of Representatives may be in play.

The Republicans have an inbuilt advantage in the House. They tend to win 4 or 5 percent more seats than they do votes.

With Clinton leading front and according the The Financial Times as of October 18 by close to 7 percent in tracking polls, the question is whether such a margin would be translated into House votes or whether the peculiarity of this election might be more likely to encourage split ticket voting, which is the process by which voters will choose different parties for different offices.

In the meantime, markets will get anecdotal evidence about the state of the U.S. economy that is provided by the monthly Beige Book of the Federal Reserve. With the divisions of the Fed becoming ever more apparent, it’s not just the performance of the economy overall, but how different aspects of the economy are performing that is likely to dominate attention.

Fed Chair Janet Yellen seems to be focused on the labor market while Vice Chair Stanley Fischer is more focused on credit growth, price pressures and financial stability for instance.

In this context, it might be helpful to recall what Mr. Fischer said in his speech: “… low interest rates make the economy more vulnerable to adverse shocks that can put it in a recession. That is the problem of what used to be called the zero lower bound on interest rates … Operating close to the effective lower bound limits the room for central banks to combat recessions using their conventional interest rate tool--that is, by cutting the policy interest rate… I started by noting the costs of low interest rates, including the limits on the ability of monetary policy to respond to recessions, and possible risks to financial stability.”

In Europe, a two-day summit of the 28 EU leaders, which will include the UK, but this time around as “invited” member to the party, begins tomorrow. Please keep in mind that the UK has not triggered yet article 50 of the Treaty on European Union (TEU) that among other things reads: “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.”

 

We’ll see what comes out, but investors shouldn't count on getting much wiser.  

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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Just because something is possible doesn't mean that it's likely to happen.
china, economy, dollar, fed
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2016-47-19
Wednesday, 19 October 2016 07:47 AM
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