China's Goal To Manage Expectations

Jim Trippon  |

China’s economy has engendered a lot of worry and fret recently in many quarters, as anxiety has grown over the weaker prospects for GDP growth in 2012. The latest remarks, this time from China’s premier, Wen Jiabao, did little to allay global fears. Wen addressed China’s national parliament in his state-of-the nation speech, and announced growth in the economy this year would be 7.5 percent. This figure is lower than the 8 percent many China observers had pegged for its economy this year, and is down from last year’s 9.2 percent actual growth rate. Global markets recoiled at the news, as share prices were driven down.

Markets are by nature hyper-sensitive reaction mechanisms. The question is whether they’ve been reacting properly to China’s economic news, including the latest. While growth featured an outsized GDP gain of more than 14 percent in 2007, with 10 percent annual GDP growth being a rough benchmark over the last decade, the question is what impact this slowing growth will have in China and how important will this be for the global economy?

The first part of the question, that has to do with the impact of a lower growth rate on China, is that China has a much better chance of keeping its inflation down. The target rate for inflation by the Chinese government is 4 percent, while actual inflation had bumped up at times over 6 percent only to fall in the last few months. China’s benchmark interest rate hikes and lending reserve requirement for banks were both raised in early 2011, and have played their part in harnessing inflation. Growth was pushed down also in a major way by the eurozone crisis, when that flared up last year, but even more as some of the sobering remedies began working their way through Europe’s economies. One of the major effects was that Europe, as a huge export market for China, lowered its demand for goods as its economies pulled back in the face of the European debt crisis.

China watchers point out that the 7.5 percent GDP remark by Premier Wen is more of a hittable pitch to swing at for China’s economy than an actual forecast. In other words, China’s government has historically provided soft tosses, or lower targets than they know the economy will hit, so outperformance has been the hallmark. The earlier government forecasts had actually been based on a 7 percent GDP growth figure, astute China observers have pointed out. So, the 7.5 percent growth will likely be eclipsed in 2012, despite the slowdown. As China’s policy makers set the bar relatively low, it manages expectations.

China GDP Annual Growth Rate Source:

One of the things that has been happening is that the markets have been mis-reading what the China slowdown may mean for the global economy. The assumption back in November initially was that a slowdown in China was going to dampen the US economy further. Yet the markets shrugged this off and in the US, the S&P and the Dow began to rise. Part of the reason is an initial misunderstanding of the lower GDP figure for China. A 7.5 percent GDP growth rate is still formidable growth. While some China critics have said that anything below the 7 percent figure would be a dire development for China, the case for this view has been highly unconvincing. What China’s export market has lost, temporarily, may be picked up in some measure by its consumer demand, so that will help.

China Inflation Rate Source:

China critics have said that in the short term its government hasn’t really done much in the way of easing, and that in the long term it has been slow to bring reform and address the imbalances in its economy. Again, though, this view seems to miss the policy actions last year that brought down inflation, while late in 2011 the government moved with central bank easing via loosening the reserve rate. The difficult goal of turning down the overheated property sector has at least been addressed, as falling housing prices in China and a construction slowdown have already begun. Now the government is shifting the dynamic in the housing market by providing the opportunity for lower down payments for first time buyers, while still discouraging excess speculation. The government’s delicate balancing act in the housing market will likely continue. The shift from exports and capital spending to consumer spending will be both a long term and short term plan. Interest rate cuts and more availability of credit may also moderate the slowdown. These can all be effective measures.

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