Is China’s Wen Whistling in the Dark?

Reader Nivethan pointed to a Bloomberg story, “China Says 8% Growth Within Reach Using $585 Billion Stimulus.” This may be a tad more significant than it appears (I also looked at Xinhua, but got the singular, and probably completely unfair impression that Wen’s speech to the party Congress was of the “give everyone at least a little something” variety).

What is telling about the Bloomberg piece is that it has Wen saying he can achieve an 8% growth target (necessary to keep unemployment from rising, given the number of new workers each year) using only the previously announced stimulus program. That is despite the fact that 4th quarter growth was somewhere between zero and 3% if it had been reported on the same basis as the US and other advanced economies (the official release was 6.7%). And most analysts concluded that the “stimulus” program was at least 2/3 already budgeted spending, and of the 1/3 or less new spending in the two year program, most of that took place in the second year. In other words, not very stimulative.

The markets rallied around the world yesterday on the notion that China would up its stimulus efforts (the idea that that would make much of a difference to the global economy, given the internal focus of any Chinese program, is already a bit odd). The Bloomberg piece would seem to throw a bit of cold water on that idea, but it’s being spun as a plus:

Premier Wen Jiabao said China’s 8 percent growth target for this year is within reach, indicating the government doesn’t see the need to increase a 4 trillion yuan ($585 billion) economic stimulus.

It’s “possible for us to meet this target,” Wen told delegates in his annual speech to China’s parliament in Beijing today. The nation needs to “reverse the economic slide as soon as possible.”

Wen’s prediction that China will ride out a global recession and his pledge to “significantly increase” investment helped extend a rally in Asian shares. Collapsing exports have dragged the world’s third-largest economy to its weakest growth in seven years and cost the jobs of 20 million migrant workers, adding to the risk of social unrest.

“They are keeping ammunition in reserve,” said Stephen Green, head of China research at Standard Chartered Plc in Shanghai. “Every day the world economy gets worse and they’ve probably got two years of very slow global growth to get through.”

The rules of Keynsian stimulus are that it be aggressive, early, targeted, and temporary. China’s back loaded program, and its failure to boost it in the face of serious deterioration (the trade number out of all the big exporters are mind-numbingly bad, and China also is suffering a stall in one of its other big growth engines, commercial real estate). And that’s before allowing for possible further downside due to rising protectionism.

But the markers are in the mood to rally, so news perceptions will be adjusted accordingly.

Update 2:30 AM: The Financial Times’ piece on the Wen speech is up, and it confirms my suspicions:

lobal financial markets rose on Wednesday after Chinese officials indicated Mr Wen would introduce new stimulus measures on Thursday. However, Mr Wen did not announce additional measures beyond the Rmb4000bn investment plan unveiled in November.

Moreover, he provided only a few extra details to help clarify how much of that investment will be genuine new spending that would not have taken place anyway and where the money will be allocated.

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  1. Anonymous

    The Chinese have now obviously advanced significantly enough in comparsion to the U.S. that they have become like adept at employing the WTF Solution to its vexing economic problems. They afterall also have the successful U.S. template to follow as well.

    “If you believe it often enough pretty soon it becomes true.”


  2. Anonymous

    Actually, the sector of the domestic economy that has really stalled in China is residential real estate construction, not commercial real estate constrcution. Property prices have fallen 30% in Shenzhen, Guangdong (bordering Hong Kong) from the peak, and property prices have also fallen 10%-20% in Beijing and Shanghai. Property transactions have fallend around 40% in all the major cities, and developers have slowed down their projects due to cash flow pressures and tighter availability of loans.

  3. bg

    This is window dressing. Nobody knows what is going to happen next, and the Chinese export economy is the tail of the dog.

  4. Purple

    Japanese exports to China have plummeted in the last few months. For China, that indicates both less manufacturing of finished products and less domestic demand.

    Look to countries with a history of accurate public information before listening to the Chinese government.

  5. Anonymous

    This is only the keynote, intended to summarize what will be revealed over the next few days in Beijing. There will be more details later.

  6. Anonymous

    We are seeing global posturing here folks. No country wants to be the first to go down because then everyone else will be able to blame them for their problems. If this were not a game for all the marbles it might be funny but rational options are starting to leave the table now and things could get pretty ugly if the G20 meeting produces no real results.

    I fear for our future.

  7. Glen

    That’s the difference between the US and China. In the US it’s bungled misinformation; in China, it’s controlled misinformation.

  8. Anonymous

    You are as usual a lone voice of sanity. I do hope your clients have the guts to hear you.

    We are going through our own ritual behaviors. But we are looking for magic. Image Geithner in a buffalo headdress ( his gourd wrattles, while Bernenke sits in the sweat lodge waiting for a vision and Summers filled with special mania dances non-stop for days.
    But in the end the sad truth is:

    The Buffalo aren’t coming back.

  9. Anonymous

    China will most assuredly announce 8% growth, perhaps even 8.88%. And they can announce it now, or go through the motions of actually waiting until the end of the quarter.

    In the past there have been occasions when they announced before the quarter ended, proving just how ‘efficient’ their infrastructure and bureaucracy are. Indeed, with these systems already up and running, one wonders what they will spend their stimulus on.

  10. Anonymous

    Actually, the wait and see atitude from Wen’s speech is better than I expected. I am afraid that they put another few trillions in the fire right now…That would be a total waste if the 1st one is just 50% waste (from another angle, at least 50% go into the economy).

    I do hope they increase spending on education and healthcare though.

  11. Stephen Lins

    The old saying is “The government pretends to tell the truth and we pretend to believe them.” After yesterday’s Wall Street mini-rally, I think we can add “And naive Western investors really do believe them.”

  12. S

    IT is SHOCKING that here we sit and a central bank, a CENTRAL BANK, is out with astatement that they are going to monitize debt to “stimulate” the economy. We have entered the realm of the total sureal. The onkly thing more shocking is the bankrupt academic complex is sitting in their cubicles with their carlyle sweater and HBS drivel cheering the move with charts ad curves in hand.

    UK is attempting to “show leadershi” which is even more laughable. The US and the UK are attemptring to reignite thier special relationship a la 1920s. Different time and different decade. The Fed is the single most viruent insituion in the world. it has systematically dragged the world into the sewer with its policies over the past several decades. And now it seeks via indenture (swap lines) and ZIRP and “creativity” to rinse wash repeat.

    The only question is now when will the new currency regime arrive

  13. Anonymous

    am i the only one who thinks, “duh…so hillary went there to get the chinese to help talk up the markets” and in return had to promise to keep bailing out china’s US interests (like, um, AIG…)

  14. Anonymous

    Without a revival of exports, it is hard to see how stimulus can make up for the lost GDP.

    American consumption of Chinese manufactures are still stalling. Look for the subtle changes in patterns, the change from buying sticker priced goods (even at Walmart) for low cost goods that have had their prices slashed, etc.

    A more realistic target of growth this year is 4% if they are really lucky and if the demand do not continue to weaken.

    Plausible is negative growth for at least a quarter, and 2-3% for the year.

    Given this scenario, debt, and bad debts at Chinese banks, especially in real estate, will be a severe problem.

    Wen would have been better to have brought expectations down by announcing a realistic target rather than the “best case”.

  15. lineup32

    “Look to countries with a history of accurate public information before listening to the Chinese government.”

    For sure, all the endless discussion about the China economy based on official and guessed numbers is more like projecting Chicago Mob activities based on street prostitute
    arrest rates or drug busts!

  16. Anonymous

    “Wen would have been better to have brought expectations down by announcing a realistic target rather than the “best case”.”

    Only naive foreigners believe that the expectation is still high in China.

  17. Cat

    Wen is buying time. For what purpose? We wonder if there are any ongoing redeployments of ground units of the Peoples’ Army.

  18. Anonymous

    Export PMI for first quarter did improve quite a bit. On the ground, based on my information (I work in the ODM/OEM software business for mobile devices) export order is starting to come back again. Inventory at importer’s warehouse is below normal level by about 20%. Our vendor is telling us that they are having trouble finding people because so many people returned home and did not come back. So overall, things are indeed better than last October. Chinese companies are moving into ODM business that is traditionally occupied by Japanese/Korean. We just received a large order from a Chinese ODM, which is a vendor for a US cell phone provider while our Japanese friends are telling us their orders are getting canceled left and right. Price is probably the main issue. Chinese ODM phone is probably 20% to 30% below Japanese/Korean price. On the other hand, real estate is a huge problem, although typical Chinese real estate loan require something like 40% down, so the chance of defaulting on loans id pretty small. But the price decrease will no doubt create pressure on spending. In addition, if the US economy goes south even more in the second quarter, I suspect China will be in trouble as well.

  19. Anonymous

    I believe that we have entered into economic war with the rest of the world. As the country whose money is the Reserve Currency for the world we have failed to live up to the stewardship of the monetary system by allowing the current excesses of investment banking to bankrupt the American dollar.

    Much of the rest of the world is making it clear their view of our failings and I expect them to act on their beliefs in what constitutes rule of law in a workable economic system. America had abrogated its responsibility to rule of law in regard to managing their financial system but not all other countries intend on following their lead.

    As an American I am ashamed of the greedy, immoral, illegal and egocentric actions of my country. We need to take responsibility for our crimes and excesses and work with the rest of humaninty as an equal to fix the mess we have and continue to make.

    Will we use bullets to defend our lack of financial morals? I hope not.

  20. Anonymous

    Those bailout monies (that supposedly go into black holes) are actually looking for the next bubble to park in….it ain’t going to be China, maybe India but first the/a world currency has to stabilize the financial markets…..still a couple years away at the least.

  21. Kathleen

    The Chinese aren’t going to hand out money, since their people will immediately stuff it under the floor boards. Overall, they will be doing great to achieve 1% growth next year.

  22. Thomas

    To the poster who wrote there is no problem with commercial real estate in China:

    There certainly seems to be a problem regarding huge vacancy rates for Shanghai and Beijing office space, an increasing number of large shopping malls with few or no tenants, and an extremely low occupancy rate of most 4/5 star hotels nationwide. Sounds like a problem with commercial real estate to me.

    To the poster who’s into ODM:

    The positive developments in your industry seem to be mostly related to the appreciation of the Yen. I doubt this can be extrapolated to the Chinese economy as a whole.

  23. VangelV

    The rules of Keynsian stimulus are that it does not work. If governments want to stimulate the economy the best things to do is to let the markets work and let malinvestments be liquidated. Why save toy factories that make low margin trinkets that are exchanged for pieces of paper that are printed by a bankrupt government when those assets can be better used to produce other goods that are in demand by domestic consumers?

    If the Chinese are students of history they would look to Harding, not Hoover/FDR.

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