Peter Cai, a columnist at Australia’s Business Spectator, has an interesting take on how far China’s government will go in stimulating the economy in the face of a slowdown.

Cai notes a week ago, the People’s Daily, the Chinese Communist Party’s official mouthpiece, ran a front-page story quoting an unnamed official about the current state of the economy. Editorial content in the People’s Daily is a molder of politically correct views and often serves as a trail balloon signalling key policy shifts.

The message was a bit convoluted. But Cai extracted the following point:

“The first key takeaway is: don’t expect any large-scale stimulus.  A lot of people in China are calling for strong stimulus measures to beef up the flagging economy. The economy is growing at its slowest pace since the outbreak of the global financial crisis. Many important economic indicators are flashing red.

But the government is adamant that it will maintain a steady macroeconomic policy. This means they have to strike a balance between ensuring the economy grows within the targeted range — which is around 7% — and implementing a suite of ambitious reforms.

“But, if we pull out old tricks of indulging in massive stimulus and investing more, it will only create new problems and increase the weight of baggage. This will make our structural reform process even harder. It is not that we don’t want GDP growth anymore, we want quality and more efficient GDP,” says the anonymous policymaker quoted by the paper.”

Cai may be on to something. Indications are that officials are getting more nuanced about prodding the economy and are eager to ensure that their stimulative shots don’t lead to a Chinese version of “irrational exuberance” in markets and the economy as a whole. A move to tighten margin trading requirements which precipitated last week’s sharp market selloff and central bank efforts to sop-up excess liquidity may reflect this more balanced approach.

So while officials will keep priming the pump, the stimulus anticipated by some might not be as large as expected. Some pundits say the froth in the current bull market is being whipped by high school dropouts and construction workers with new brokerage accounts. If this is true, a steadier hand at the regulatory wheel is imperative. Chinese stocks could gyrate in disappointment in the short term. But in the long run, Asia Unhedged opines this is a good thing.

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