What was the most important event of the week past? This is the question Jim O’Neill, Chairman of Goldman Sachs Asset Management, asked everyone he encountered during the week — from family members and friends, to colleagues at work and elsewhere. The answer he received: Italy. When asked about other events, most respondents would still persist: Italy. Only one person mentioned China.
China’s consumer inflation (CPI) is in rapid descent and many economists are now confident we are going to witness CPI data that start with a ‘four’ in the months ahead, from 5.5% this month and from 6%-plus in the previous months.
If it wasn’t for the all-dominating news flow and general focus on Italy, China’s slowing inflation would have received the attention it deserved. Because Chinese inflation starting with a four is going to make the authorities in Beijing comfortable enough to move the foot off the tightening pedal and start thinking ‘stimulus’ again.
Don’t just take my word for it. The number of research reports about China that are now predicting a switch to economic stimulus has increased exponentially this month. In fact, say economists, China’s switch is already taking place while Europe and Italy are commanding investors’ full attention.
According to freshly released data this week, new Chinese yuan (CNY) loans rebounded strongly in October to CNY586 billion from CNY470 billion in the previous month. Andi Ji at Commonwealth Bank points out that if the October momentum continues, new CNY loans in the final quarter could reach CNY1,800 billion, up significantly from CNY1,511 billion in the third quarter.
In other words, China is already confident enough to loosen the tightening and to start stimulating again. In typical Chinese style it’s being done with no fanfare and no announcements.
This, however, doesn’t make it less important.
Jim O’Neill predicts this is how the BRIC (Brazil, Russia, India and China) nations can and will support economic growth next year. Combined, they will grow their respective economies by an estimated extra US$2 trillion, which is the equivalent of a troubled Italy. Investors with a specific interest in resources and resources stocks on the share market will be delighted because history shows Chinese tightening tends to have a downward effect on prices, but stimulus usually has the opposite impact.
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