There has been much drama and even more propaganda heading into today’s China Q2 GDP number (expected to print at 7.5%, down from 7.7% previously). As even the stunned FT explains, a week ago Xinhua reported that China’s minister Lou Jiwei said at a news conference that China was aiming for 7% growth this year. “This figure was half a percentage point below the government’s official target, a seemingly small difference but one that opened a chasm in terms of policy. The lower target was taken to imply that Beijing was unperturbed by the current economic slowdown, and that pleas for stimulus from companies and local officials facing bankruptcies and debt defaults would go unanswered.”
Then yesterday morning, the world woke up to the most blatant example of revisionism, when the same Xinhua “decided to quietly touch up Mr Lou’s words. The original article was changed to show that he had said 7.5 per cent, exactly consistent with the target announced at the national parliament back in March.” As the FT further shows, there is no “lost in translation moment” here and it was pure and simple propaganda meant to keep global markets steady at a time when the tiniest change from the trendline can lead to dramatic moves across asset classes.
Of course, all of the above is very much irrelevant: when it comes to economic data, in China whatever the Politburo’s Goalseek.xls model says is what goes, and credibility – especially in the context of a historic CNY1 trillion deleveraging – is irrelevant. But one reason why today’s GDP print is even more irrelevant than ever, is becuase as Xia Bin, an economist with the State Council’s Development Research Center and government advisor, said “Arguments about whether China will grow at 7% or 7.5% are “pointless” because the economy is already in a financial crisis which may only worsen if the government doesn’t address the country’s crippling debt problem.“
Indeed, whether China is growing at 8% or 3% is anyone’s guess, and is largely irrelevant as long as the country can keep generating the required credit money expansion to avoid stall speed or a crash landing. However, what is very disturbing, is when dissident voices start emerging from within the placid lake that is China’s economic hierarchy, such as Xia. His opposition to the Politburo is a far more worrisome sign than if China’s GDP will print at 7.7%, 7.4% or stun the world with a just barely 7%+ print.
Although monetary printing presses have kept the worst of the crisis at bay, the central government needs to face up to China’s debt problem and brace the market for a deep and painful adjustment, he told a forum here at the weekend.
“We need to find ways to let the bubble burst and write off the losses we already have as soon as possible to avoid an even bigger crisis,” Xia said.
“Deep adjustment means economic growth slows as costs are paid, it means hard days, it means the bankruptcy of some companies and financial institutions and it means reform,” he said.
Although Xia has a reputation for being outspoken within a bureaucracy which tends to shy away from open discussion, his views reflect growing concern within the government about the costs of the credit and investment binge that was ushered in by the global financial crisis.
Xia said the government should mobilize its huge foreign exchange reserves, close bankrupt companies and encourage private investment to boost growth.
In other words, engage in far more aggressive tapring: something that the Fed tried and failed miserably at.
Ironically, it is now China’s job to show the Fed how weaning capital markets off the Chairman’s teat should be done.
Sadly, none of this will matter when in about one hour, China reports a number that is just slightly better than expected (at least according to whisper predictions) and the algos go into hyperliftathon mode, further disconnecting “markets” from fundamentals and reality.