There’s still no respite for Chinese stocks. The market bounced around violently today with the SSE Composite making at least eight or nine up or down moves of more than 1%, before closing the day at 1720, down 0.5% for the day. This is the lowest closing in over two years (it closed at 1722 on September 15, 2006). The declines were led by industrial companies this time – not the usual banks and real estate developers – because of Friday’s data release suggesting the development of problems in the industrial sector (which I discussed in a Saturday posting).
Amid attempts at reassuring the public (“China’s economy in good shape despite global financial turmoil”, say the main business-related headlines today on Xinhua and in the People’s Daily), it is clear that policy-makers are feeling anything but reassured. Xinhua reports that “Wen sees worst year for growth”, and even through the soothing noises in the article it is clear that policy makers are in a quandary:
The government should find the right balance between curbing inflation and maintaining a stable economic growth, Premier Wen Jiabao said on Saturday. “We must be aware that this year would be the worst in recent times for our economic development,” Wen said in an article published in the Qiushi journal.
Curbing inflation is still a challenge, even though it fell from a 12-year high of 8.7 percent in February to 4.6 percent in September, he wrote. In his article, Wen said that the global downturn will continue to pressure the Chinese economy, which already faces a number of problems.
Given the situation across the world, "it is very difficult to maintain high growth and a low inflation rate in the long run," the premier wrote. “The (global economic) situation is worsening,” and the negative impact of the volatile international market on the Chinese economy would become more obvious as the days go by.
The main task of the macro-economic policy is "to successfully maintain a balance between stable and relatively fast economic development and curbing inflation," Wen said.
In many of my conversations with Chinese and foreign analysts recently there has been a growing consensus – shared by me, by the way – that since inflation is politically easier in the short term than a sharp banking contraction (although likely to be worse in the medium term), there would probably be excess monetary easing to “fix” the banking problem, and that this would lead to inflation down the road, and not just in China.
But nearly every statement I have seen by senior Chinese officials continues to make a big deal about the inflationary threat.
