Markets Stumble After China Slashes Growth Target For 2015, Warns "Downward Pressure Growing"

You wouldn't know it if you looked at the price of oil, but arguably the world's largest economy just unloaded a kitchen sink of fears, warnings, and downgrades on its economy; the most notable being:

  • *CHINA SETS 2015 GDP GROWTH TARGET AT ABOUT 7% (from 7.5% in 2014)

In a report to be delivered to the government tonight, Premier Li Keqiang warned China may face more economic difficulties in 2015 vs 2014 and downward economic pressure is still growing (despite Western 'analysts' proclaiming China fixed). The currency is weakening on the news and AsiaPac stocks are lower and as Chinese stocks open lower (despite hints at more easing), millions of newly minted "can't lose" Chinese investors begin to worry.

 

 

Among the most notable headlines:

  • *CHINA SETS 2015 GDP GROWTH TARGET AT ABOUT 7%
  • *CHINA TARGETS ABOUT 6% TRADE GROWTH IN 2015
  • *CHINA MAY FACE MORE ECONOMIC DIFFICULTIES IN 2015 VS 2014
  • *CHINA'S ECONOMIC DOWNWARD PRESSURE IS STILL GROWING: LI
  • *CHINA MONETARY POLICY MAY EASE FURTHER IN 2Q: CHEN YULU

 

  • *CHINA WILL BUILD ADDITIONAL 7.4M UNITS OF PUBLIC HOUSING
  • *CHINA TO EXPAND YUAN'S GLOBAL USE: LI KEQIANG WORK REPORT
  • *CHINA TO INCREASE TWO-WAY YUAN FLEXIBILITY
  • *NO NEED TO WIDEN TRADING BAND THIS YEAR, CHEN YULU SAYS

And the reaction...

The offshore Renminbi is 160 pips weaker than its early morning levels and gapped 50 pips weaker on the growth target cut...

 

Chinese Stocks are lower...

 

But can you spot the moment that the world's largest economy took an ax to its economic forecast for the year in the oil chart below?

 

*  *  *


Just two short weeks ago, one of Beijing's official mouthpieces printed a story which seems to have pre-empted much of this with a warning from no lesser person than Lu Lei, the head of the research bureau of the People's Bank of China, the central bank.... As ChinaDaily reports, strcutural adjustments may cause a liquidity squeeze...

The nation is paying a price for economic structural adjustment, reflected in commercial banks' surging nonperforming loans. To avert further risks, the People's Bank of China may take measures to control the expansion of debt.

 

Difficulties are increasing for the central bank to manage liquidity. The traditional measure of increasing money supply based on the position for foreign exchange purchases is no longer efficient, and the uncertainty of capital flows is increasing.

 

Amid slower economic growth, a rise of commercial banks' NPLs will lead to liquidity problems, which will cause volatility and influence interbank interest rates.

 

However, it is unlikely that we will see a systemic liquidity crisis, although there may be a short-term liquidity squeeze.

 

Macroeconomic policies have different target periods.

 

For the short term, they focus on maintaining moderate liquidity. In the medium term, the policy emphasis will be on fiscal and financial reform. And in the long term, the target will be to reshape the sustainable growth model.

 

The policies should avoid aggressive stimulus, accelerate the deleveraging process and drive structural reforms.

 

Monetary policy fine-tuning is likely according to changes in the economic situation, with a preference for maintaining reasonable market liquidity and providing a neutral financial environment for industrial upgrading.

 

The reforms of the exchange rate and interest rate systems will continue and encourage fair competition in the financial markets.

 

China's economic growth rate may remain stable at a relatively lower level in 2015, between 6.9 and 7.1 percent, restricted by sluggish demand.

 

Fixed-asset investment is likely to slow further, restrained by the gloomy real estate market and a moderation in local governments' drive to invest. Consumption growth will become more stable.

 

Upside risks will mainly come from the growth in external demand, but a trade surplus will result because of a decline in imports rather than growth in exports.

 

The biggest medium-term uncertainty for the economy is deflation risk.

 

The Consumer Price Index may remain low under the pressure of a weakening economy. It is difficult to anticipate any rise in the Producer Price Index, as the structural rebalancing process has progressed slowly and overcapacity is still a serious issue for manufacturers.

 

As global commodity prices may remain low, imported deflation may deepen in 2015.

 

Cross-border capital flows will become more complicated as the European and Japanese central banks pursue monetary policies that run in opposition to those of the United States, and the dollar is expected to further appreciate.

*  *  *

Can anyone in America (or Europe) imagine a central banker speaking so forthrightly about the possibility of turmoil?