Over the past month, we have come to believe the Chinese tightening cycle is in the late innings, as liquidity was tight, with both small businesses and property developers struggling to access capital. Despite the sharp clampdown on credit and economic slowing, growth remains healthy, at a 9.7% annual rate in the first quarter of 2011. The Chinese government sounds as though they are near completion of their task, with Premier Wen saying that measures targeting inflation "have worked." Just as the slowdown was initiated by the Chinese government, who has many levers to slow inflation and excess growth, it can quickly reverse policy to reaccelerate growth. A soft landing in the Chinese economy is increasingly likely, with growth slowing and no crash. See more in Michelleās article Bears and Bulls in the China Shop.
While inflation could still rise and additional tightening measures could still be implemented, the Chinese government has already begun to either implement or contemplate new stimulus measures, such as a new "cash for clunkers" program, policies to loosen credit for small businesses, provide relief on luxury goods import duties, and pilots to reform the pension system.
Positive reaction to possible end of Chinese tightening
Source: FactSet, Shanghai Stock Exchange, Standard & Poor's. As of June 28, 2011.
* * Indexed to 100 as of June 28, 2010. A larger/smaller number above 1 denotes greater outperformance/underperformance of the Shanghai Composite Index relative to S&P 500 Index.
Local investors in China have taken notice, prompting a rise in the Shanghai Composite. The Chinese market is often viewed as a leading indicator, due to Chinaās rapid growth and large size. Rising Chinese stocks may be a sign that global growth is on the mend. With Japanese production coming back online and the boost to consumers' pocketbooks from declining gasoline prices, we could finally witness a virtuous cycle of self-sustaining growth.
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