The Xi and Li put?

Stock markets may be betting China’s leaders will soon stimulate their economy.

Do investors want to see more bad data out of China? It seems they do. Confirmation the world’s second-biggest economy is slowing, to 7.5% in the second quarter from 7.7% in the first, somehow sent the Shanghai Composite Index up 1% and the Shenzhen Composite Index up 2.3% yesterday. Even Australia shrugged off declines in mining stocks; the sector fell 0.5%, to post a 0.2% gain in the S&P/ASX200 Index yesterday. 

The theory goes, courtesy of Credit Suisse’s Damien Boey, the faster the slowdown in the Chinese economy the quicker President Xi Jinping and Premier Li Keqiang will intervene to pump it up again. After all, the legitimacy of Chinese Communist Party rule since Deng Xiaoping seized power has been economic management. Between 1978 and 2011 economic growth in China averaged 10%. Perhaps the Chinese and Australian stock markets reckon China’s economy is close to bottom. Boey thinks so.

Analyzing steel production, electricity generation and exports, Boey says real industrial production growth is 3%, barely enough to keep the great factories of the middle kingdom ticking over. If anything he says the economy is “going backwards”. Iron ore prices are up – the spot price for iron ore imported through the northeast port of Tianjin has gained 12% since June 26 – but so what? It’s just speculative restocking, says the Credit Suisse strategist.

He may be right. Investors don’t want to read too much into the recent increase in the Tianjin iron ore price. Rio Tinto shares have been stuck between $50 and $55 a share since the beginning of June. BHP Billiton shares have been likewise range bound, between $30 and $34 for more than a month. Perhaps that’s why the valiant efforts of the ASX/S&P200 Index to break through 5,000 have so far failed. There just is not enough of a gas in the local economy’s tank or its biggest buddy, China, to push it much higher (see Carr's Call: Four danger signals for domestic investors).

This calls into question efforts by Beijing to clamp down on China’s so-called shadow banking market. These measures may have to be put off if the economy stalls and unemployment rises. Xi Jinping and Li  Keqiang on no account want any murmurs of social unrest made more possible, as the 2011 protests in the Guangdong town of Wukan show, by the internet and social media. Here’s hoping for the Xi and Li put: direct intervention and investment by the central bank to stimulate the Chinese economy. If that happens happy days, at least for stock markets, could well be here again.