What Is China's Real Growth Rate?

The news from China continues to push stocks both higher and lower so Moneyshow's Jim Jubak assesses what he thinks is their real growth rate.

The official target for growth for 2013 in China remains at 7.5%.  That’s where the government set it.  That’s where all the votes of various bodies were in and it’s still the official target, but you can see its sliding.  We’ve had a couple of instances in the last few weeks, where people say, you know, officials have come out—officials who are in the know, so it’s not really a mistake---they’ve come out and started talking about 7%, and then finally, you had Premier Lee come out and say, oh, okay, we’re really not talking about a range.  Acceptable range is 7 to 7.5%, but we absolutely will not go below 7.  This is a big shift.  I don’t know how much of this is embedded in the price of commodity stocks, but my guess is that they were really thinking that 7.5% would be a bottom.  If 7% is now the bottom, you’re going to see some kind of rejiggering of the prices of those stocks.  The real danger, though, in that sector, would be if we start to move below 7. 

Now it looks like the Chinese government really wants to defend seven on the same day as Premier Lee came out and said 7% is our bottom, he also said, well, you know, we’re going to speed up our spending on construction on railroads in Southern and Western China.  It’s significant that he wasn’t talking about new money; just talking about speeding up the spending of already allocated money, budget is set.  So, really, it’s a very limited kind of stimulus.  To the degree that there are any analysts out there all trying to put numbers on this, the consensus is well, that we really might see net stimulus from the central government of about $25 billion of 2013.  That’s a big contrast to the stimulus after the global financial crisis, when China was really trying to stop an economy in free fall and stimulus then was $586 billion-$586,25; you can see the difference.  The ideological difference is that you’ve moved from a period where the government seemed to be really fearful of breaking through 7-1/2, because they were afraid that it was going to produce social unrest or the consequences to the connected people in the party, and their pocketbooks were going to be too high.  7% now seems to be acceptable, because the government has really ratcheted up its concern about the need to reform the Chinese economy. 

If the Chinese economy is going to grow at a decent rate going forward, certain things have to happen.  The financial system has to have certain reforms.  There have to be changes in the way that banks do loans.  Strangely enough, you’ve got a runaway loan credit demand situation in China, but medium-sized and small-sized companies in China can’t raise any money.  All the money’s going to the big state-connected institutions and you’ve got a real credit crunch in the small and medium size part of the economy, so there’s a sense that it’s crucial for these reforms to happen and if China needs to sacrifice a half percentage point of growth to do that, that’s fine.  The question really is—the big question is not so much whether we’ll get 7%, because I don’t know that—no one really does.  I mean, how do you judge where you’re going to be able to stop a locomotive as big as China.  The question is well, if we go below seven, if you move toward 6-1/2 or 6.7, what does the government do?  Does the government decide that that’s okay, if we’re going to get the reforms that we need out of that, or is the government going to say, okay, that’s unacceptably low.  It’s too risky.

We’re going to stimulate again, and really throw the reforms out the window.  So that’s the crucial thing.  7% has implications for all Chinese stocks and all commodity stocks around the world, but it’s really what happens below that, that’s important going forward, and we won’t know what that is until we get there.