Will markets react as strongly to Bernanke as they did before?

Updated: 2013-07-16 10:51

By Zhang Yuwei (China Daily)

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Will markets react as strongly to Bernanke as they did before?

Global markets are watching for two major events this week - China's growth data out on Monday and Federal Reserve chief Ben Bernanke's testimony before the House and Senate later this week.

The world's No 2 economy's second quarter growth rate of 7.5 percent - which was projected by many experts - wasn't a complete surprise. The immediate reaction from the markets wasn't gloomy, with currencies in Latin America - where China is the largest consumer of commodity exports - rallied and gold futures posted their biggest weekly percentage increase in nearly two years after the data were released.

Both eased investors' fears of a slowdown in China.

Yukon Huang, a senior associate in the Carnegie Asia Program, said pundits have given too much attention to monthly and quarterly movements in China's growth rate, while the country needs to be on a path to a "sustainable rate".

"China is on a prolonged path in moving from double-digit growth rates to a more sustainable rate in the range of 7-to-8 percent," said Huang, whose research focuses on China's economic development and its impact on Asia and the global economy.

"But given the excess capacity and high inventories built up during the post stimulus period, the decline may cause growth rates to dip below its longer-term norm," Huang added.

Huang said that the bottom may not be reached until the end of this year or even early next year "since Beijing rightly does not want to ease credit availability".

"But the real priority is to develop and move on the structural reform agenda so markets should await the announcements which are likely to come out this fall," he added.

The 0.2 drop in the second quarter - and a possible further slowdown - may have raised concerns from many who consider China as an economic engine for the global economy. But some experts - like Huang - think China needs to take on a must-go-through process to slowdown and retain sustainable growth.

The lackluster export performance and mediocre growth in domestic demand in China mean that real GDP growth is likely to slip from 7.8 percent in 2012 to 7.6 percent in 2013 and 7.4 percent in 2014, forecasts Washington-based think tank Institute of International Finance (IIF).

Guo Feng, a senior economist focusing on Asia/Pacific at the IIF, said the 7.5 growth rate is within the context of macroeconomic policy that is focusing on fostering adjustment to establish a "basis for sustainable growth in the long run".

"However, more stringent macro-prudential measures and the absence of aggressive fiscal stimulus so far this year also give credence to recent reports that the government is contemplating lowering the growth target for next year to 7 percent," Guo cautioned.

Lawrence Goodman, president of the Center for Financial Stability, a New York-based think tank focusing on financial markets, said although the year-over-year growth rate fell to 7.5 percent, there have been many instances over the last two decades of lower growth.

"The authorities seem focused on reshaping the drivers of growth," he said. "So a tilt toward personal consumption away from investment and exports should open China to more balanced growth.

"Stable and more balanced growth over time should prove worth the present slowdown in economic activity especially if activity in the shadow banking sector cools," said Goodman.

Following Monday's data from China, Bernanke will testify before a House panel on Wednesday and a Senate Committee the next day.

Investors inside and outside of Asia are likely to watch Bernanke's testimony carefully for any indication on when the US central bank will end the $85 billion a month bond-purchasing program, the so-called quantitative easing 3.

Chinese shares responded with a strong slump as the Shanghai Composite Index dropped in one day to its lowest point in nearly seven months after Bernanke's remarks about exiting the QE3.

Experts say that an end to that stimulus would likely lead to higher savings and less consumer spending in the US, which raises concerns among many foreign export-based economies in Asia.

But maybe this time just as much as the global markets have been prepared for the slowdown from China, the reactions may not be as strong as they were last month.

Goodman said that while Bernanke's words on Wednesday will be important for markets, "actual Fed action should prove of greater importance than remarks".

"Over the last month, Fed communication initially signaled steps for an exit from QE - which shook markets. This was followed by more dovish remarks, after the sharp reaction by bond markets," said Goodman.

"So, the bi-annual Humphrey-Hawkins will prove important, but the actual tapering should be most meaningful for markets," he added.

IIF's Guo agrees.

"Although the Fed Chairman Bernanke's remark on the need for (continued) 'highly accommodative monetary policy' for the foreseeable future clearly took some by surprise last week, the market reaction from Asia/Chinese markets will be less this time," said Guo.

Contact the writer at: yuweizhang@chinadailyusa.com

(China Daily USA 07/16/2013 page2)