We see little risk that Beijing will prematurely tighten and send the economy into a ‘W’-shaped recovery. First, because the Chinese Communist Party remains the world’s most liquid financial institution, so it faces no fiscal constraints.
Second, with unemployment high, inflation low, and no signs of a bubble in the real estate or equity markets, there is no economic-policy reason to ‘tighten’. As noted above, Chinese officials are well aware of the risks of premature tightening.
Third, with unemployment high and inflation low, it is in the Party’s political interest to maintain GDP growth at about the 8% level.
We do, however, expect Beijing to continue withdrawing some of the stimulus measures that have done their jobs and are no longer needed at such a high level. Thus, we expect 2H09 and 2010 lending to be pared back significantly from the 1H09 peak, but credit flows should continue to be strong enough to qualify as ‘appropriately loose’.
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