How China is Prepping the Market for Sub-Par Growth

Today, just two weeks after the end of the June quarter, China will release its second quarter GDP statistics. It’s a miracle of statistical compilation.

So let’s look at China’s GDP. It should come in comfortably around 7.5%. That’s the current official target for China’s ruling Communist party. And given the statistician has just two weeks to compile a vast amount of data, it’s fair to say they probably start at the end point and work backwards to get the desired result. Although we wouldn’t be surprised if the number comes in slightly under the official target to signify a weakening of future growth.

In fact, Chinese officials are already preparing the markets for a lower growth future. Last week, China’s Minister of Finance said that economic growth of 7% or even 6.5% wouldn’t pose too much of a problem for China. That’s prepping the market for lower future growth.

But the Ministry of Propaganda wasn’t too comfortable with such candid rhetoric. Over the weekend, China’s official Xinhua News Agency corrected Lou Jiwei’s quote and reaffirmed China’s official 7.5% growth target. Gotta keep the confidence up…because the only thing to fear is fear itself, right?

This tells us there is still quite a tug-of-war going on in China between those who recognise the need for economic rebalancing and those whose wealth and power rely on the status quo. There is no doubt that China’s economy could keep growing at 7.5% for another few years, but it would set itself up for an almighty bust if it did.

Having just gone through the biggest credit boom in modern economic history, it’s probably already too late to avoid the bust. But at least China’s new leadership understands that their longer term survival depends on managing the coming bust as best as they can.

So today’s number, whether it comes in bang on target or a little below or above, is meaningless. Because history tells you that all credit booms end in periods of sub-par economic growth. What’s sub-par growth for China — 5%, 4%? That’s sounds about right to us, and in 2014 that’s what we think you’ll see.


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Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

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‘Gotta keep the confidence up’….isn’t that what all governments do, irrespective of colour?. Given the huge amount of data collected from very diverse regions, methinks some ‘sleight of hand’ would be afoot. It’s happening all over the world., why not China.

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