So far this week, China has witnessed a default by a major property developer and another by a state-owned company. Dubious firsts, to be sure, but they couldn’t have come at a better time. They provide a dose of market discipline that China sorely needs.
The country’s 7 percent growth in first-quarter gross domestic product can’t mask the flashing-red indicators that its economy is running into trouble. Industrial output, fixed-asset investment and retail sales have all slowed; land sales are contracting. The industrial sector’s 6.1 percent growth outpaced retail and wholesale trade, according to Bloomberg Intelligence, suggesting that the vaunted shift from manufacturing to services isn’t happening as hoped. Prices are falling almost across the board.
All this bad news puts pressure on Beijing to do more to stimulate the economy. Over the weekend, the People’s Bank of China issued a bigger-than-usual cut to the ratio of reserves banks must hold, in effect adding almost $200 billion worth of new liquidity. For now, leaders seem hopeful they can direct where that money goes. Regulators have clamped down on margin financing, for example, to discourage the funds from flowing into an overheated stock market. Banks focused on agricultural development have received even deeper cuts to their reserve ratios, while authorities have encouraged China’s big policy banks to lend to small and medium enterprises and strategic projects such as clearing slums.
Read Full Article HERE