CAN THE DRAGON SUSTAIN ITS OWN WEIGHT

CAN THE DRAGON SUSTAIN ITS OWN WEIGHT

                                                   --  by Dr. N. R. Phade

Dear Reader,

           Welcome to Fortunes at nrptrends. 

Today lets peep into the state of affairs of The Dragon - China.

China has set itself a growth target between 6.5 - 7 % of gdp. What explains this optimism, this future -telling ? Its been of the observation that Chinese targets, once set, have ways to come true. The economic slowdown, the turbulence in cash market, the near to meltdown of currency, fall in exports, uncontented population, unrest - all these concerns melt away to naught in face of their leaders conviction. To achieve their goals, it seems, their leaders have many a ways in store.

There is always some prudence in setting a target range as against China's past practices of setting a single specific number and burning all in a strife to achieve it. It seems practically unfruitful in managing an economy as large and complex as China just to hit a virtual target. It always has its owns negative implications. China has always borne the brunt of such policies in the past.

Yet China remains a developing country (its per capita income is still a fraction of that in advanced countries) and its market reforms are incomplete. Official data shows that about 98.99 million people still lived below the national poverty line of RMB 2,300 per year at the end of 2012. With the second largest number of poor in the world after India, poverty reduction remains a fundamental challenge. ( see here )

Flexibility is always meritful when nations economy is concerned. There be good governance and not an attitude to drive for a nation to truely prosper. Hence keeping such flexibility, as China seems to be in favour of now regarding targets is a healthy sign. But the actual problem is quiet large. The target range set seems to be quiet higher in the present world economic scenario. Many a economists and even the IMF has pegged Chinese growth below 6.5% this year. But the Chinese Premier's report has quiet surprised the economic society world over. There are always two implications - two temptations China creates for itself when it sets a higher target for itself, both are dangerous in a sense.

The first would be to manipulate and present a picture wherein growth is to the mark when its actually not. Resorting to such tactics wouldn't be the piece of pie for the Chinese government but concerns about the same would loom large as the headwinds to growth intensify. A scenario of doubt shall always prevail this year.

The second temptation would be that the government act as a growth engine; a growth driver, as has been done in the past. But such bubbles surely burst some day. Many a nations have learnt this truth out of experience. This and other things make it important to refer to the PM's report.

Lets peep a bit into Chinese PM Li Keqiang's report. It seems that China shall lean more heavily on fiscal as well as monetary policy to achieve its target. It is planned that it works a deficit of 3% of GDP, which is higher from 2.3% last year. It is also aiming for 13% growth of M2 (a broad gauge of the money supply), higher than 12% last year. Though both don't sound quite a increase, they are enough to signal the mindset of the government. It is indicative that the government would ratchet-up pro-growth measures. Its noteworthy that the deficit includes only budgetary expenditures. Since the government has many a expenditure heads it would be difficult to contain the deficit to 3%. The credit growth in January, with 2.51 trillion yuan ($385 billion) in new lending by Chinese banks was the most ever in a single month. This may indicate quite a loose monetary policy.

Historically China has proved its concept to turn to stimulus when growth is weak but the nature of stimulus is changing over time. Previously China relied on heavy government spending. But this time it aims for a lower growth rate in fixed-assets investment which was targeted 15% previous year. This year much of the fiscal push appears to come from lower taxes, which there-by shall put more money into the pockets of consumer. This shall, in turn, help to increase spending and consumption in markets, thereby improving the bottomline of the economy without increased stress on the government treasury. China is aiming for just 3% growth in this year’s budget revenue, much lower than a target of 7.3% last year. This is in line with supply-side economics of which China has gained since some period now. The basic stance is to clear the path for corporate, instead of pouring more money into Government dominated infrastructure projects.

The administration seems to be quiet realistic in its view on global trade as of now. China had aimed for 6% growth, but both imports and exports contracted, and they badly missed at it. Now the government hasn't set one this year. It has realized that the external environment is beyond its control and it wouldn't want to be embarrassed again.

As against that, the government seems to be confident of its grip on domestic side. Mr Li not only set the target for year 2016 but also confirmed a central objective of new five-year economic plan ( which to be approved during the parliamentary session ). It is that the economy will grow by an average of 6.5% between now and 2020. “By that time, our economy’s size will have exceeded 90 trillion yuan,” he said. Surely a great Dragon of determination China is, it seems to me that its weight isn't too heavy for itself to sustain and carry.

Weather this comes true, Time is the only answer.

That's it then friends. Have a great time. Keep visiting for more. Happy Investing from  Fortunes at nrptrends.