Weak data in trade and domestic activity combined with a weak demand are the factors that caused the second quarter report of economic growth revealing under expectations figures. With U.S. and E.U., China’s major markets, still recovering, the external demand fall significantly while the internal demand wasn’t strong enough to fill the gap. Because of this situation, the price of commodities fell significantly and lead to disadvantages for commodity-exporting countries as Australia. Even if most economists believe that the 7.5% target of growth will be missed for sure, the Premier Li Keqiang was determined to reassures the population that the economy of China is “relatively high and in a reasonable range”.
Recently, officials of the People’s Central Bank of China agreed on the fact that reforms rather than stimulus perform better because of their limited impact on the short term. The Government will avoid major stimulus as the situation in 2008 with 4 trillion yuan and the consequences were the encouraging of lending which lead to a property bubble and the creation of a pile of debt. The current restructuring is oriented towards domestic consumption with the aim of diminishing the dependence on exports and investments for growth.
With a market dominated by inflation, bank-lending and investments all below expectations, the money supply has been increased. Moreover, the private debt has been increased to 168% of GDP this year from 119% of GDP four years ago and high potential for non-performing loans has been observed after lending a record 17.5 trillion yuan in 2009-2010. In this situation, the People’s Central Bank of China decided to step in and lead to the cash crush in the nation’s money market. Thus, seven-day repurchase rate rose by 2.7% and one day rate rose by 5.27%, factors that made lending harder. The idea is that the nation has to learn how to protect itself from financial risks, how to wisely use its financial resources and how to better control the bank lending (lending for projects in industries with overcapacity will be banned). It is considered that the shadow banking is expanding and highly risky investments are made in order to boost profits.
Under these conditions, officials are promising a more prudent monetary policy with focus on reforms of the yuan exchange rate mechanism and interest rate liberalization as well as more flexibility and attentiveness to the international pulse.
With China’s new approach, officials consider that the quality is targeted instead of quantity. The world must be prepared for a slowdown in the economy of China because it’s a price worth paying considering the long term benefits. Plus, the recent optimism about the U.S. and E.U. may be what the world’s economy needs in order to survive to a less productive China.