The Chinese State Council is to meet this week – on Wednesday 18th July, I believe. Premier Wen has been taking again about the decline in the economy. Indeed, he stated “It should be clearly understood that the momentum for a stable rebound in the economy has not been established”. He added “we need to comprehensively assess the situation and recognise the problems, difficulties and risks, in particular the downward pressure on the economy”. Whilst the Chinese authorities do not want another surge in residential property prices, recent data suggests that housing prices may be stabilising and that the volume of buying picking up.
However, the key remains the change in leadership in October this year. The Chinese authorities will do everything they can to ensure a smooth transition, particularly following the Bo incident. They have begun to ramp up fixed asset expenditure, but given the problems globally, the economy continues to grow more slowly. Time is running out and, I for one have no doubt that the Chinese will do everything they can to ensure a smooth transition ie more stimulus. They may not come out with one headline grabbing programme, but they know they need to resuscitate the economy.
I have been bearish on China for well over 3 years now. I will continue to be bearish on China in the medium to long term. However, in the short term, I believe that they will stimulate their economy. Recently, 2 interest rate cuts have been greeted with a yawn, indeed bearishly as investors have (rightly) believed that there are significant problems in the Chinese economy. This has shocked the Chinese leadership, who clearly are deeply concerned. They are beginning to understand that they cannot control markets as they control China – must be a real shock to guys who believe in a command economy. Welcome to the real world.
I expect a number of significant positive moves to stimulate the Chinese economy imminently. Personally, I think it would be dangerous to be bearish China and its derivatives, such as Australia, the miners, A$, my way of playing China in the short term.
Short note today, much to your relief.
Kiron Sarkar
16th July 2012
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