Jack Lew checks the tea leaves on China’s economy

July 8, 2015 2:59 PM (UTC+8)

 

Treasury Secretary Jack Lew worried aloud Wednesday that a worsening slide in Chinese stocks might damage the country’s economy and sideswipe Beijing’s economic reform efforts.

“The concern, that is a real one, is what does it mean about long-term growth in China,” Lew said at an event on financial stability In Washington, D.C. on Wednesday. He also noted the crisis will test China’s economic management abilities.

“How do Chinese policymakers respond to this, and what does it mean in terms of core conditions of the economy?” Lew said.

How bad will be impact on China’s economy be? China economists such as Wei Yao of Paris-based Societe Generale bank argue that while a market crash would be an undoubtedly painful scenario — which would potentially shave 0.5-1% off real GDP growth in the following 12 months — the immediate damage should be manageable.

The reason for this, she explains, is that while Chinese households’ exposure to the equity market has increased, it remains relatively small.

Others say the stock plunge will hit China’s economy below the belt. One of them is Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS. Biswas told Deutsche Welle in a Tuesday interview that the financial losses relating to leveraged positions add to the significant imbalances facing the Chinese economy. This includes the slump in the residential property market, weakening growth in investment spending, excess capacity in key industrial sectors such as steel, and the rapid rise in lending by shadow banks between 2010-2014, largely unregulated until very recently.

Biswas also warns that there is a 25% risk of a China hard-landing occurring sometime over the next two or three years that would significantly affect the global economy.

Asia Unhedged disagrees with Biswas’ Dr. Doom assessment. However, the People’s Bank of China (PBOC) must move decisively on the monetary front if the current crisis is to be contained. We earlier noted the adverse impact of unseemly and untimely high China real interest and exchange rates, and the deleterious effect this had on Chinese exports. Another blunder was the PBOC’s stubborness in keeping the yuan exchange rate pinned in a very narrow range to the dollar. This, even after the IMF recently certified that the yuan is now “fairly valued.”

All this resulted in a very substantial monetary tightening effect on PBOC exchange rate policies, which for the most part, have tended to nullify monetary easing measures since late 2014. Asia Unhedged believes these policies must be reversed and that decisive and transparent overall monetary easing measures must be instituted for Chinese stock markets to be brought onto a recovery path on the back of a recovery in earnings.

 

 

 

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