China signals GDP determination

Markets were given a helpful shot in the arm this morning after the Chinese premier said that the ‘bottom line’ for economic growth is 7%.

Investors may be reading too much into this statement, but it does carry the possibility that the Chinese government will look to enact stimulus measures if it looks as if growth will come in below this level. This is certainly the view of HSBC’s chief economist Stephen King, who thinks that while stimulus may not be a certainty it is possible if Beijing begins to fear possible social unrest due to slowing growth.

Today’s news is a reminder, as if one were needed, of the importance of China to the global economy. As a result of today’s comments, investors are likely to be more relaxed about the prospects for markets in the coming autumn season. Miners are doing well on the back of hopes that raw materials consumption in China will rise in the coming months, which will come as a relief to many investors that have seen the sector decline steadily this year.

It does seem as if China is moving in the direction of a more active economic policy. Last week it surprised markets with the decision to remove the floor on lending rates, opening the field for competition among banks in terms of providing lending for companies.

Now that fears over tapering have receded, the news from China will give a further boost for markets over the summer. It is a prudent move on the part of Beijing, since China was always going to be vulnerable to a shift in risk appetite due to any US Federal Reserve tapering.

In the long term, it will still be difficult for China to avoid copying Japan in seeing a damaging change from relentless growth to stagnation. Increases in domestic consumption and careful efforts to encourage spending rather than excessive saving will help Beijing in this regard.

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