could the chinese rate cut fuel

John Vail, chief global strategist at Nikko AM, takes a look at the implications of the China rate cut and warns on the “experts'” tendency to be over-optimistic on the country.

could the chinese rate cut fuel


The additional stimulus is hoped to improve sentiment and boost manufacturing, but there are concerns that it may fuel another property bubble instead.

China is gradually and moderately loosening a whole array of policies in order to achieve a “soft landing” at about 7.5% GDP growth.

However, the one area that the leadership would prefer to restrain is the price of private residential property, preferring instead to keep condo prices flat for several years in order to allow broader affordability with rapidly growing middle class wages.

China’s economic policies are driven now, and likely for the next few years, by political considerations; in order to maintain popular support for the Communist Party, the leadership must narrow the income differential and improve living conditions for the average worker.

The Arab Spring taught the leadership that dissatisfaction with corruption, low wages and high income gaps can be extremely de-stabilising.

In the past, the pro-business lobby in China (including the regional governors) would ignore various mandates from the central government, but there now seems to be a strong consensus that such mandates should be obeyed in order to maintain social stability.

Slowing down a fast growing economy that has been greatly under-regulated and which has experienced some elements of a property bubble is always dangerous.

The shadow banking system and a potential surge in non-performing loans (including from local governments) are just two of the serious issues that China must face.

Fortunately, so far, property prices have been flat for the past year, while transactions have sharply picked up in April and May. China still is in the early cycle of its development, so it is easier for it to grow out of its problems.

Clearly, we will need to watch China very closely, especially as many “experts” are conditioned to suggest that the country will always strongly rebound and they could potentially be in denial about true developments.



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