Chinese stocks rose the most today since July 11 after Chinese press reports indicated the government sees 7% growth as the bottom line it will tolerate for economic growth. That’s according to Bloomberg.
There was some confusion among Chinese press reports as to what exactly the growth threshold is (conflicting reports indicated 7.5%)... and it raised even more questions. Is it a “floor” or a “bottom line” that the government is setting? And under what timeline are they talking?
But the message it sends is pretty clear.
"It basically means the government is going to throw money at the problem again,” Yahoo! Finance senior columnist Mike Santoli says in the above video.
Local media in China reported the government was looking to increase investment in rail projects, which sent rail stocks higher.
This news comes in the wake of a cash crunch. Also June trade numbers missed badly, with exports falling by 3.1% compared to the same period a year ago. And China's second quarter GDP numbers came in at 7.5%. This was just in-line with average forecasts but slower than the previous quarter's 7.7% growth. And remember - it was 14.2% just six years ago.
While investors are excited – for now – the bigger question remains whether the government is serious about reigning in malinvestment and rebalancing the economy to get it on a more sustainable path. Today’s news does little to instill much hope on that front.
"This shows that the leadership there is playing last year's game, or the past 30 years game... which is focusing on these gaudy high GDP targets,” says Santoli. “When in reality... if its being achieved at all, if you can believe the numbers, [it’s being achieved] by over-investment in projects that don't necessarily have an economic purpose. I do think that's the bigger problem with China."
Ruchir Sharma, head of Emerging Markets at Morgan Stanley Investment Management and author of "Breakout Nations,” told The Daily Ticker that China doesn’t even need 7-8% growth anymore to generate full employment because the population is aging. So returning to a “more sustainable growth rate” of 5-6% isn’t the worst thing for China or the global economy.
For now though it doesn't look like growth will be headed in that direction. The government's rhetoric “removes one concern which was that the government over there was gonna 'bleed the patient' and let growth really soften up a lot more," says Santoli.
Check out the video for more on how far China's "easy money gesture" can propel stocks.
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