The People’s Bank of China (PBOC) ain’t messing around. Overnight they cut short term interest rates for the third time since November as they battle an economic slowdown that threatens their 7% GDP “target”. This morning, Bloomberg news had a good discussion (here) of the perceived risks/benefits of the PBOC’s policies which of late have been monetary, not fiscal (meaning encouraging lending as opposed to the government throwing money at stimulus projects) This is a change from policy that has existed for more than a decade, which has been a large contributor to their high single digits growth.
Here is a quick roundup of some of the headlines related to China this morning:
China rate cut: How bad are things getting? – CNBC
6% growth in China? ‘You must be joking’: Faber – CNBC
China Adds Stimulus With Third Interest-Rate Cut in 6 Months – Bloomberg
China’s Cut-Rate Credit Rankings Raise Alarms as Defaults Loom – Bloomberg
China stocks woo investors with new names – FT
And one I want to really highlight. This gem from Reuters
China springs a leak before springing rate cut. – Reuters
From that Reuters piece, I swear I LOL’d when I read this:
“local media spelling out the benefits for normal folks… pay less for their mortgages and see their stocks go up”
This quote is classic, as they note the last two cuts have not done much for the economy as exports dropped 6% year over year in April, with inflation up 1.5% yoy, and down sequentially month over month.
While in depth analysis of PBOC’s fiscal/monetary policies are above my pay grade, I can tell you that their most recent policies have not resulted in economic growth (you could argue they’ve possibly lessened a deceleration) What they certainly have done is create a risk asset bubble in the form of stocks. And who knows where it ends? Up 100% in the Shanghai Composite in the last year seems a tad bubbly, but if the PBOC has determined one of their primary tools for ebbing the slowdown is to have people see their equity values go up, then who knows where it could stop? 6000 ain’t so far away!
I have no clue what’s going on over there. And to be frank, very few of your favorite pundits calling for a boom or a bust have one either. I speak to people who do business in China (from here and there on the ground) and I get very different points of view whether the slowdown is manageable or a minor blip.
About ten years ago (shortly after Baidu’s (BIDU) U.S. ipo) I went to Beijing and Shanghai to meet with a half a dozen Chinese on-the-line companies (including BIDU). I wanted to hear straight from the rooster’s mouth (it was the year of the rooster) to get a sense just how real these companies were. Looking back, I realize the only company I met with that is still relevant is BIDU.
The point here is simple, sensational headlines about China, its centrally planned economy and whether or not it will cause the world to head back into recession (or lift us back out) is a surefire way to sell newspapers, get viewers and a boatload of clicks. But I suspect most of the opinions are nothing more than a shot in the dark. The situation over there is opaque and decided by a small number of people in a back room.
Good Luck making investment decisions in the U.S. based on what you think is going on in China.