Will China be next to intervene to fix its ailing economy?
After fresh bouts of central bank action in Europe and the US, the pressure is now on for the Chinese to come up with similar support, beyond what it is already doing.
We asked our readers last week if they were hoping that China would follow through on that pressure and deliver another round of stimulus. Most said that they were, but it was an undecidedly slim margin.
China’s predicament is becoming increasingly desperate. Until recently, many bulls had considered the country’s central bankers to be doing a good job of charting a path through difficult conditions. Nobody quite knows how China manages its economy, but the market’s confidence reflected an assumption that it was uniquely wise and uncommonly precise in its ability to control things.
Part of this power was assumed to derive from the fact that China is unhampered by the inconvenience of democracy (though a lack of accountability doesn’t seem to have helped the Fed’s image to the same degree).
Even bulls are now reconsidering those assumptions. China’s attempt at a surgical strike on its over-inflated property market was a dramatic failure, prompting a broad slowdown in the economy and further downward revisions to growth forecasts.
In response, China cut interest rates twice and encouraged lending and spending, while trying to curb property speculation, but the leadership has also stressed there will be no return to the old days of excessive investment (or stimulus).
That may seem to be the end of that, but the continued weakness is testing politicians’ appetite for inflicting the pain of (relatively) slower growth, particularly in the run-up to the leadership change in November, when seven of the nine members of China’s top political body are expected to step down, including President Hu Jintao and Premier Wen Jiabao.
A smooth transition will be a small miracle if recent events are any judge. The incoming president Xi Jinping went missing for two weeks without explanation, and the fall of Bo Xilai and the rise of the princelings have drawn attention to the corruption of the elite, many of whom are now secreting their wealth overseas ahead of the upcoming leadership change.
During the weekend, riots broke out in cities across China. The violence was ostensibly provoked by Japan’s territorial claims in the South China Sea, but television footage of rioters hurling missiles at riot police suggests more than simple xenophobia is at play.
If conditions continue to get worse, a quick but decisive intervention in the economy may start to look more attractive.