How Will Wall Street Respond To A Surprise GDP Report Out Of China?

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The Chinese Flag (Photo credit: Vin Crosbie)

Wall Street will be watching China?s GDP report closely on Sunday evening (US time) to find out whether the country is in for a soft or a hard landing.

With China?s two economic engines ? exports and construction ? slowing, analysts and international agencies have been cutting growth estimates. On July 8, Citigroup Citigroup cut its estimate to 7.4% from 7.6% for 2013, and to 7.1% from 7.3% for 2014. On July 10, the International Monetary Fund (IMF) lowered its own growth forecast from 8.1% to 7.8% for 2013; and from 8.3% to 7.7% for 2014.

Even Chinese officials have grown pessimistic, with finance minister Lou Jiweito expecting a 7% GDP growth in 2013.

Still, anything north of 7% is a good number compared to the anemic growth elsewhere, and could confirm a soft landing.

Nonetheless, some China observers are concerned about the growing corporate and local government debt and the safety of its banking system. ?Chinese companies and local governments have borrowed recklessly to build factories, train stations, and bridges to nowhere,? wrote Barron?s Jonathan R. Laing in a recent cover story?China?s looming debt crisis. ?Miles upon miles of empty apartment buildings rim hundreds of Chinese cities; industries suffer from rampant overcapacity; and largely empty new highways, bridges, shopping malls, railroad stations, and airports more than hint at problems.?

That would certainly spell trouble for the country?s state-owned banking system, which has financed these projects, as discussed in a previous piece here. Simply put, China may be in for a hard rather than a soft landing?a growth rate below 7%.

How will markets respond?

It?s hard to say, as markets have already discounted the soft landing scenario. The most likely response is to be negative, especially for industrial equipment exporters to China, and for commodities.

But markets may turn around quickly; as a weak GDP report will revive hopes for a fiscal and monetary stimulus.? Markets further understand that GDP reports are lagging rather than leading indicators, and begin to factor in a European recovery that may help China?s exports.

Source: http://www.forbes.com/sites/panosmourdoukoutas/2013/07/13/how-will-wall-street-respond-to-a-surprise-gdp-report-out-of-china/

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