The Great Debate

Market plunge makes Beijing’s exit harder

wei-gu.jpg– Wei Gu is a Reuters columnist. The opinions expressed are her own —

The Chinese leaders have a dream. The banks pump trillions of yuan into the market, which props up asset prices, creates new demand, and gets the economic engine roaring again. Then, just before inflation starts to surge, the money is drained out of the system.

Others, from U.S. Federal Reserve Chairman Ben Bernanke to Bank of England Governor Mervyn King, share the dream but the Chinese economy, still largely driven by the state, should make it easier to realise. Unfortunately, investors in Shanghai’s stock market have their own ideas — the mere suggestion of credit tightening caused the index to plunge 20 percent in just two weeks to Wednesday’s close before bouncing slightly.

The Chinese policymakers are left between a rock and hard place. At some stage, they must stop pumping money into the system, and prepare to mop it up instead, but timing this to avoid another stock market slump looks close to impossible.

Investors can remember what happened the last time. The central bank’s resumption of sales of one-year bills in July looks similar to the tightening action which began in May 2003. That prompted a six-month fall in stock prices.

China economic forecasts: go herbal or Western?

wei_gu_debate –Wei Gu is a Reuters columnist. The opinions expressed are her own–

Which would you believe when it comes to diagnosing the health of China’s economy — the pulse-taking of the herbal doctor or the lab tests of Western medicine?

Beijing’s leaders are like the herbal doctors, using creative metrics such as power output and shipping indexes that can give a relatively accurate snapshot of manufacturing activity.

Private-sector economists, by comparison, believe in more mainstream data such as money supply and fixed asset investment even though they might not be completely useful in measuring a transitioning economy such as China.