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Commanding Heights
Chinese Challenge Fuel Centralization

China’s economic boom, which saw double digit GDP growth over two decades and pulled hundreds of millions out of extreme poverty, appears to be slowing down, with (almost certainly inflated) official government figures showing last fiscal year’s GDP growth at around 7 percent. Most recently the WSJ reports that a ‘stock-market rout’ has the government nervous, and that officials may pursue a policy aimed at lubricating the flow of money by reducing stamp taxes, including those on private sales of shares. But there may be as many potential pitfalls here as there are windfalls:

 …It is a tricky task. One reason to hold off would be that stamp taxes, which represent around 4% of China’s total fiscal revenue, have served as a rare bright spot in the flow to state coffers in the past year.

The amount of such duties collected by Beijing has surged more than 11-fold over the past year to reach 31.2 billion yuan ($5 billion) in May, though it was still shy of its record in August 2007 of 32.7 billion yuan. […]

“Reducing stamp taxes would be an effective way to improve investor sentiment,” said Peng Junming, head of Junfan Investment Co., an investment firm in Beijing. But like other methods the government is trying, it “could only help stabilize the market temporarily,” Mr. Peng said. “How the market performs in the long run will depend on the progress with rebalancing the economy.”

Timing Chinese financial markets is a game for insiders, as the level of the country’s stock markets comes to depend ever more closely on government policies aimed at keeping the bubble at Goldilocks proportions.

But there are two big things that investors and policymakers can learn from what’s happening in China. The first is that investment opportunities seem harder to find. More and more money is surging into the financial markets, which suggests that there are fewer and fewer opportunities that the Chinese themselves see for direct investment in what has long been the fastest growing major economy in the world.

The second is that China’s government is still groping for a way to manage what it sees as a transition from its old, export-oriented growth model to a new system based on domestic demand. On the one hand, policymakers fear that speculative market fever will send stock and real estate prices into an unsustainable bubble that will end in a terrible crash. On the other hand, they worry that if they don’t support stock in real estate markets, prices will sag and the economy will continue to slow overall. As a result, Chinese policy tends to oscillate nervously between inflating bubbles and trying to correct them, gently.

Some forecasters see this, and predict imminent doom for the world’s second-largest economy. But it’s hard to say that the game is over or even that it will end soon. Chinese authorities have a lot of money and a lot of determination.

But if it isn’t possible to call an end to China’s remarkable economic expansion, it’s fair to say that China’s long boom is showing more and more signs of age. This information is probably more useful to policymakers than to hedge funds. Policymakers need to understand that Chinese authorities look with some concern on the country’s economic future. They are working in a system that gets more complicated and harder to operate every day. One consequence of this concern is the forceful push to centralize power at the top, and to strengthen the position of the Communist Party by the sweeping anti-corruption purge. China is circling the wagons, which means that the Wagonmasters think there’s a danger of Indian attack.

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