In case you haven’t heard, China has its own Mark Felt, the “Deep Throat” of the Watergate era. But instead of unearthing official corruption at the highest level, the so-called “Authoritative Person” makes an appearance in the official newspaper of the Chinese Communist Party every so often to reveal official incompetence in economic affairs.
In an 11,000 word article on the front page of yesterday’s People’s Daily, the “Authoritative Person” went on and on about the state of the Chinese economy. The media scuttlebutt is that the author is none other than Liu He, a top economic aide to President Xi himself.
The article argues that:
- Debt fueled growth in the first quarter is not what the Chinese economy needs.
- The recovery in China is more likely to be L-shaped than U- or V-shaped.
- China should avoid strong stimulus in the short term as it causes pain in the longer term.
- Supply side reforms are key to future growth.
- Monetary stimulus is unnecessary and growth is sustainable without monetary help.
What Should We Make of All This Palace Intrigue?
Even to a casual observer like me, it was quite clear that the debt growth rate in the first quarter was not sustainable. The fact that senior policy makers in China acknowledge this fact is not a surprise but a good thing nevertheless. It’s also quite clear to me that the Chinese economy will need a lot of help if it is going to transition to a sustainable consumer-driven economy. As a result, while monetary stimulus may not be needed or provided, fiscal stimulus is going to remain an integral part of Chinese policy. Debt growth may be curtailed and speculation in various Chinese markets—from metals, property and equities—may end up fizzling out, but policy is still focused on maintaining a semblance of mid-single digit growth for quite some time.
The bottom line is that the Chinese ruling elite wants growth, structural reform at the state-owned enterprises and some curtailment of debt-fueled growth, especially if it creates a non-performing loan problem for the banking sector over the long term. The fact that the most senior policy makers in China are focusing on these issues is a good thing rather than a matter of concern.
In the near term, it is quite likely that we will see a bit of a pullback in growth. Recent speculation in Chinese markets anticipated a sharp rebound. Although that is unlikely, growth could be in the 6% range. That is lower than before, but I don’t anticipate a hard landing, a sharp devaluation or a recession. Growth in China and the emerging markets is likely to be better than growth in the developed markets. As a result, I still very much like emerging market assets over developed market assets.
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