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Muddled Picture

China: ‘We have indeed underestimated the severity of the external economic situation.’

How hard will China land? So far, the government has tried to assuage investors with strong steps to ease the effects of slowing growth. It passed a $585 billion stimulus plan four years ago and the People’s Bank of China (PBOC) has cut interest rates three times since the end of 2012. It has also offered bank refinancing operations to inject billions of yuan in liquidity into the banking system and keep banks lending money.

Despite this activism, an advisor to China’s central bank believes that officials have underestimated the severity of the slowdown. “We have indeed underestimated the severity of the external economic situation,” says Chen Yulu, an advisor to the monetary policy committee at PBOC and a professor at Renmin University in China. He added that the bank would make its future decisions based on external economic indicators. In particular, the Chinese have taken a hit from the European slowdown, as exports to the troubled region accounted for nearly 6% of GDP in 2011.

The People’s Bank of China may also have more room to stimulate further via monetary policy. In a note to clients, Societe Generale writes, “There’s no doubt that Chinese easing could have more impact than further moves by the Fed or ECB, which are already scraping the bottom of the policy barrel.”

Expectations are clearly starting to build for another round of action from Chinese officials to shore up the economy and the stock market. Amid such chatter, the Shanghai composite was up sharply Sep. 27 — with little justification from economic data.

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