What a difference a couple of months can make.
China’s interbank squeeze in June led to a sharp drop in the local stock markets, and by early July, it was difficult to find anyone who did not think China’s economy was in deep trouble.
On Monday, the Shanghai stock market had its largest gain since December 2012. The Shanghai composite index is up more than 13 percent from its low on June 27, its lowest point so far in 2013. Trade, inflation and manufacturing data from China over the last couple of weeks have all been generally positive.
It is not clear that the economy’s fundamentals have significantly improved, or that the government has made progress in reining in excessive credit creation and misallocation, but Beijing is doing its best to ensure stable growth. Those predicting a “Lehman-style credit crisis†or a sharp slowdown a couple of months ago appear to have underestimated the central government’s resolve to keep things on track.
We are three weeks from the end of the third quarter, when Chinese banks will again face their usual quarter-end stresses. But another liquidity squeeze is unlikely for at least two reasons.
First, although interbank rates are still higher than they were before June, the central bank has been injecting liquidity and the banks appear to have taken the June lesson to heart. Second, Oct. 1 is the National Day holiday, the 64th anniversary of the founding of the People’s Republic of China. It is hard to imagine that Beijing wants a repeat of anything like the chaos experienced in June right before such a holiday, so banks should get the liquidity they need, one way or another.
Upbeat outlook
The Financial Times published an opinion piece on Monday that was written by Prime Minister Li Keqiang, on the occasion of the opening of the Summer Davos Forum in Dalian later this week. Mr. Li, as expected, offered an upbeat view of the economic situation:
Observers ask whether China’s economic slowdown will lead to a sharp decline - or even a hard landing - and whether our reform programme will be derailed by complex social problems. My answer is that our economy will maintain its sustained and healthy growth and China will stay on the path of reform and opening up. …
Shortly after it took office in March, the new Chinese government made clear its policy was to sustain economic growth, improve people’s wellbeing and promote social equity. We can no longer afford to continue with the old model of high consumption and high investment. Instead, we must take a holistic approach in pursuing steady growth, structural readjustment and further reform.
Mr. Li’s comments also appear to lay down some important markers for significant economic reforms that may come out of the Third Plenum meeting in November. The reforms decided at that conclave will take many months or longer to implement, but there are increasing signs that the leadership is planning relatively bold moves.
One recent reform accomplishment for Mr. Li is the decision to establish a Shanghai free trade zone, for which he apparently “fought strong opposition.†He prevailed, and the plan for the zone was not only discussed at a Politburo meeting in late August but was also called out for its importance to broader reforms in the Chinese-language version of the official Xinhua report on that Politburo meeting.
China’s economy still has a lot of problems, but bearish investors may want to be careful fighting the momentum into the November Plenum.
Strong competition
My most recent column discussed the changing state of the smartphone market in China. Since then, the smartphone maker Xiaomi has hired Hugo Barra, a senior Google Android executive, to run its international business; confirmed a fund-raising at a $10 billion valuation (more than both Nokia and BlackBerry are worth); and introduced new phones and an Internet-enabled TV.
Apple is set to introduce new iPhones at an event in California on Tuesday, and for the first time, it will hold a satellite event in Beijing just hours later. There are reports that the company is finally close to a deal with China Mobile, the dominant mobile operator in China. A China Mobile deal is so strategic that it is hard to imagine that Apple’s chief executive, Timothy D. Cook, will not come to Beijing for the official announcement, so if Mr. Cook is at the Apple event in California on Tuesday, don’t expect a China Mobile announcement on Wednesday.
Apple needs help in China. Analysys International released its estimates of second-quarter phone sales last week, revealing that 77.11 million smartphones were sold in China in the quarter, and Apple had just a 4.6 percent market share.
