chinese growth, and why stimulus is coming

Growth in China is not a 'nice-to-have' like it is in the West. It is an imperative. Here's why...

In the West, we have a 'social contract' with our governments. We are prepared to give up certain freedoms, we agree to abide by society-wide rules, and delegate responsibility to governments to 'govern'. And in return, we get to vote. We get to assess the performance of governments, and then, periodically, kick them out if we are unhappy with their performance.

Some people view communist countries such as China as having no such 'social contract'. Without democracy, there is no contract (implicit or explicit) between the leaders and the people. No so. There is. And it is this social contract that makes it essential for such economies to keep growing.

Like in countries like Singapore, the trade-off or contract is this: As long as our lives continue to improve, as long as we get richer, year-on-year, then we are prepared to forego certain freedoms. The trade-off then, is between money and freedom. And as long as an economy keeps growing, and as long as inflation and the cost of living does not create too many social tensions, then we have a stable country. We have a deal. Democracy is optional, as long as we all get richer.

Social unrest and calls for more freedoms in these countries starts to occur when economic conditions worsen. So the danger in China is not slowing growth per se, but that slowing growth or a stalling economy creates an uprising of social unrest.

WHO CARE'S? What About MY Investments?

So, back to China's growth and the bit that investors are interested in - growth. This is why, as we hear reports of slowing Chinese growth, we should as investors expect a loosening of monetary policy in China - stimulus. As growth slows and the inflationary-genie is kept in the bottle, the Chinese Government will relax monetary policy to re-pump their economy. They have to. Their very regime and system of government depends on it.

We may be at the start of a correction. Markets are probably due for a pullback anyway, partiuclarly in the US where the DOW has got way ahead of the fundamental health of the real economy. But wait and expect the Chinese to intervene. And when they do, markets and commodity prices will rebound strongly.

Yaq