China’s Mixed Economic Signals


As is increasingly becoming the norm, China threw up several significant economic headlines this week. With the annual meeting of the country’s parliament being held in Beijing, China-watchers are focused on the various announcements and statements trying to discern clues as to the direction, pace, and manner of the reform process.

One key bit of information that is important for judging how China’s government will act over the coming months is the “growth target” for the country’s GDP. As there is an increasing acceptance that “GDP for GDP’s sake” needs to give way to more sustainable, environmentally sound method of progress; the news that 2014’s growth target is again 7.5 percent deserves consideration.

First, this is the exact same target as 2013. China beat its target last year, but only after a “mini-stimulus” was rolled out over the summer. To achieve 7.7 percent again this year (or even to hit the target of 7.5 percent), the economy will probably need more support by the late summer.

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Second, it is hard to see how achieving or exceeding the target of 7.5 percent is compatible with the more optimistic hopes for financial reform and economic restructuring (rebalancing). Pessimists will be worrying that the financial reforms necessary to arrest China’s debt build-up are going to be piecemeal again this year. It is a fact that many of the important reforms (such as eliminating overcapacity, reining in runaway shadow banking, tackling potentially dangerous elements of the property sector, or introducing more market-based elements into the financial system) are inherently “growth negative.” The medium-term implications of another year above 7.5 percent are indeed worrying.

The National Development and Reform Commission (NDRC), traditionally thought to prefer high growth over reform, plans only a slight easing in fixed asset investment growth during 2014.

More news this week, also related closely to the meetings going on in Beijing, was the revelation that China has at last seen its first domestic bond default. As of Friday, Chaori defaulted on an interest payment to its bond investors.

There remains some debate about how significant this default is for China’s financial system. As Zachery Keck noted on Friday, some believe this to be the beginning of a crisis, whilst others doubt there will be any systemic ripple effect from the default of such a small party, especially given that trouble in China’s solar sector is no secret.

It is hard to see how the Chaori default could be a “…Bear Sterns moment” for China. The company is small, in a sector that is already well known to have issues, and Beijing is still paying close attention to any fall out. In fact, reformers in the government and financial regulatory bodies consider this default to be a very positive thing. Now we know that domestic bond holders will not necessarily be bailed out, an element of risk has been introduced at last to the bond market.

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