Need to Know on China

Need to Know on China

China has been in the news the last two days, specifically a WSJ article speculating that the head of the PBOC will be replaced in October. This was the main headline cited for both Wednesday’s move higher, and yesterday’s breakdown.

Before getting into the market reaction, though, basically what the article said was Chinese leadership was considering replacing the current head of the PBOC, Mr. Zhou Xiaochuan.

Zhou is seen as a reformist—meaning he is intent on imposing structural reforms on the Chinese economy (which are needed and longer-term positive).  But, those changes, as we’ve seen, also dampen economic growth.

So, his potential removal was seen by the market as a sign that Chinese authorities may be focusing more on stimulating short-term economic growth, and U.S. stocks rose on the news Wednesday.

But, Chinese stocks didn’t—they ignored the news (implying U.S. markets overreacted) and this was part of what turned futures negative Thursday morning (the unwind of the Wednesday rally).

Bottom line with China is this:  7% GDP growth is the Maginot Line.  Fears are rising that the Chinese government will reduce its 2015 GDP growth target from 7.5% to 7.0%, and that may well happen in October. But if growth is forecast sub-7%, that will re-ignite worries about a “Chinese hard landing,” which will be a new macro headwind on stocks.  So, despite all the “noise,” the number to watch is 7% — above that and China will not be a major negative on equity prices.