It has been a very quiet weekend for financial market-moving news. Egypt and Syria brought nothing positive and even the European press was quiet. Reuters reported that the Spanish recession is deemed to be over but that is a highly debatable issue. The market is waiting to see if China makes its 7.7% GDP number, though why the market cares about massaged data is beyond my comprehension. Chinese Finance Minister Lou Jiwei said in Washington July 11 that the Chinese GDP may show growth below 7%. The official Chinese news agency walked back that number and claimed that the finance minister misspoke, probably due to travel fatigue. The consensus is for 7.7% so let’s see what the Chinese statistics delivers.
A weak number will put downward pressure on commodities and probably commodity-oriented currencies, but be aware that the Aussie dollar has already been very weak in anticipation of a slowing China dragging down the Australian raw material development boom. However, a 6% GDP number for China, compounded on a $7 trillion economy is far bigger growth than a 10% GDP number on a $2 trillion economy. The power of large numbers is beginning to play on China, which is something the market is going to have to consider when it comes to global growth.
In a July 7 article from the East Asia Forum, Yiping Huang of Peking University laid out a policy of new Li Keqiang government and calls it “Likonomics” (mimicking Abenomics). Professor Huang notes the key three pillars of the policy: no stimulus; deleveraging; and structural reform. The key to LIKONOMICS is providing less credit and structural reform. The preceding Wen Jiabao government was responsible for a vast amount of credit extension, which has resulted in a glut of capital investment and a huge amount of capacity. The Li government seems intent on running down some of the capacity, but if China’s domestic economy slows will there be a new effort to export? This will be a key question going forward. This will also be very important for the global economy because a slowing China combined with tepid growth in the U.S. and Japan, plus Europe in recession is not a very healthy scenario. It may be that Chairman Bernanke sees a 7.7% Chinese GDP as “overstating the health” of the world’s growth story.
***In a July 11 Financial Times story–“Berlin Hits At Banking Union Plan”–it seems that the Germans are challenging the European Commission for wanting to have the final say on the effective actions of a banking union. The plan put out by Brussels was “flatly rejected by senior German officials for going beyond the law and leaving taxpayers exposed.” The bottom line of any banking union and resolution authority needs a backstop, some financial entity to give quality credit to be able to absorb the loses from a banking crisis. The European Union is trying to get the backstop to be the German citizenry by pushing for a resolution mechanism in an expedited fashion.
A single resolution mechanism and its partner, the single supervisory mechanism, rushed through without any advice form the good Bavarian Burghers would result in the creation of a European-wide bad bank with Germany as its creditor. A banking union now would allow for Spain and Italy and other peripherals to dump their problem loans onto the German taxpayer. No German politician can be rushed by Brussels to accept the debts of the peripherals. A backdoor bailout would be the ultimate “TAXATION WITHOUT REPRESENTATION” and yet the market keeps buying peripheral sovereign debt. European bond buyers had better hope nothing rocks the political polls in Germany for if the anti-Euro party begins to gain in the polls, peripheral debt will get hammered.