Why the Great Wall of China’s Still Standing
The Great Wall of China is not crumbling down as some are starting to suggest following news that Chinese premier Wen Jiabao cut the country’s gross domestic product (GDP) target to an eight-year low of 7.5% for 2012. As I have said in previous commentary, China is stalling and clearly impacted by the debt and muted growth in Europe, particularly the eurozone, but the country is not in a downward spiral, as 7.5% growth is comparatively good. GDP growth in the Chinese economy could plummet to as low as 6.8% in 2012 should the growth situation in Europe and theU.S. falter, according to the Asian Development Bank.
What makes me confident is thatChinawill now spend big-time with new stimulus to make sure the country’s economy avoids a hard landing, which would be quite negative. As long asChinacan cap its inflation at the official four-percent target, added stimulus will be fine. In my view, the lower rate of growth is positive, as the inflation inChinahas also steadily declined to more manageable levels. The country’s consumer price index (CPI) came in at 4.5% in January, down from 6.5% in July, representing five straight months of monthly declines in inflation.
China is aiming for “higher-quality development over a longer period of time” and will keep its current “proactive” fiscal and “prudent” monetary program in place, said Wen.
The county wants to avoid a hard landing and halt the slide in GDP growth by initially pumping over $540 million into its banking system for new loans. China has reduced the bank reserve requirement that will allow increased loans to businesses and consumers, which will help to drive the Chinese economy.
China’s policymakers will also cut the income tax paid by companies along with the import duties on energy and raw materials in an effort to drive domestic consumption.
In addition, the added stimulus will include more funds available for key consumer spending areas, such as education, health and other services aimed to increase the disposable income available for consumers to spend on goods and services.
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Any impact on the Chinese economy could send shock waves around the world. The Chinese economy, which had been charging ahead on all cylinders and becoming the envy of the world, is showing some growth pains that could hamper the country’s rate of growth.
The problem is that the global demand for cheaper-made Chinese goods has been on the decline. Part of the reason for this is that other industrialized countries are looking at driving domestic employment by protecting local manufacturing and this would negatively impact China. For this reason, the Chinese want to stimulate domestic demand for its goods.
While the current market risk regarding Chinese stocks is extremely high as the threat of global slowing continues, I still like the future for China as an economic powerhouse, but we need to get past the near-term hurdles.
Stocks are facing tough chart resistance and I feel the risk of a near-term downside move has increased given the Greek and eurozone risk. You can read my thoughts in Stocks at Multi-year Highs, But Watch For Some Near-term Topping.