In Communist China, Economy Rebalances You

A valid concern:

No, China Isn't Really Rebalancing
The first sign of slowdown intolerance came in early March when China did what optimists hoped it wouldn't: announce another growth target. Every time data have suggested gross domestic product might slip below that 7.5 percent line, Beijing has been quick to rev the engine yet again.

Stimulus measures have included tax breaks, bigger investments in housing, faster spending on railways and other megaprojects, and front-loading of outlays at the provincial level. China's largest regional economy, Guangdong, is allocating more than $10 billion to boost growth. The National Development and Reform Commission, the central economic-planning agency, is mulling a $16 billion-plus fund for transportation that will solicit some private investment. The central bank, meanwhile, has eased up on its war against excess credit, and the shadow-banking system is still enabling inefficient state-owned enterprises across the nation.

Does any of this sound like the actions of government ready to let GDP fall to 6 percent, let alone 5 percent? Hardly, which is why economists at Nomura and UBS are rethinking second-quarter growth forecasts.

The Federal Reserve didn't rescue the U.S. economy with surprise rate cuts in August 2007 and the $168 billion Bush stimulus plan in early 2008 didn't help either. What governments want and what they get are two different things. Nothing proposed so far will prevent a crisis if one is coming.

I understand why the investment banks think China is going to take a step towards a major easing, but I still believe the odds are against it based on everything that has come out of Li Keqiang's mouth. Trusting a politician usually isn't a good idea, but I don't think Li is trying to misdirect with his frequent rejection of a major stimulus plan (and similar statements from party mouthpieces such as the People's Daily). You have to look at things from the Chinese perspective: "everyone" expects a bailout because that's always what happens. The government tries to slow things down, they get scared when the slowdown starts accelerating, and the bubble reflates. Everything up until this point indicates the government will not repeat this cycle. As an article in the WSJ notes, there's a game of chicken between government, developers and homeowners in the real estate market. Up until now, government always blinks first and their refusal to blink this time is still not believed. For this reason, there's a lot of pent up selling in real estate. There are a lot of firms fighting to stay open in the hopes that they survive long enough to see the bailout, rather than cashing it in and declaring bankruptcy. It's also unclear if the Ministry of Finance, which is not nearly as gung ho about reform as the PBOC, isn't being allowed to do some stimulus efforts as a political concession.

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