GDP growth has been the focus for the past 20 years. China has done what it had to do to keep GDP growth up in the 10% range.
In 2008 when the world fell apart, China wrote a check for $700 Billion in stimulus for its economy to keep from sliding backwards. The money is now seen in roads, bridges, schools, ports, water systems, high rises, etc.
The money has also found its way into the coffers of government officials and businessmen who routinely collect bribes to complete projects. It has also found its way into a very shaky “Shadow Banking” System. Companies and individuals have been borrowing at low rates from banks, and lending that money back out at userous rates to undocumented borrowers. I’ve read estimates the shadow banking system could represent as much as 40% of GDP.
In today’s news, Liu Yuhui, director of the China Economic Evaluation Center under the Institute of Finance and Banking under the Chinese Academy of Social Sciences, predicted China’s GDP will continue to fall to 8% to 9% by Q4, and further from there.
He also believes there will be no recession. More importantly, Yuhui surmises the cost to government of propping up the economy with stimulus has become too expensive. Local governments will not have the funding from the Central government, and the Chinese economy will have to stand on its own. With retail sales rising 17.5% this year, it’s a distinct possibility the domestic economy could start to fill in for any shortfall related to a global recession.
In Europe news - our Under Secretary of International Affairs- Lael Brainard- testfied before Congress yesterday. She says Europe’s proposed European Financial Stability Fund (EFSF) must have real teeth and be credible to the markets. The need to have the overwhelming resources to take bank defaults off the table.
We’ll see what come out of the big summit meeting on Sunday.
The China markets were lower again overnight- The A Shares down .58%, and the B shares down .62%. – once again hitting new 52 week lows. It’s a mess out there in equities.