Talk of ‘L-shaped’ recovery clobbered Chinese stocks

In case you missed it — the Chinese government all but acknowledged on Monday that it doesn’t see a big bounce back in its economy, but rather expects to see the growth trend plateauing in the next few years.

LLLPeople’s Daily, the official newspaper of the governing Communist Party, on Monday published an exclusive interview with a person named only as an “authoritative insider.” In the interview the person said China’s economic growth trend in the coming years will be “L-shaped” rather than “U-shaped” or “V-shaped.”

Since the phrase “authoritative insider” in People’s Daily is presumed to be a high-level official, the story garnered much attention. It’s not exactly slipping it under the radar, but it’s not an official announcement either.

Coming on the heels of Sunday’s release of April trade data, which showed both exports and imports falling more than expected, the interview sent the Chinese stock market tumbling to an eight-month low on Monday.

The blue-chip CSI 300 index fell 2.1% to 3,065.62, while the Shanghai Stock Exchange Composite Index lost 2.8% to 2,832.11.

Even thought the first quarter of 2016, showed structural optimization and the standard of living growing, the economy still faces headwinds, such as overcapacity, bad loans, local government debt, a property bubble and illegal financing.

In addition to fading hopes for a strong economic recovery, investors fear there will be more regulatory curbs on speculation.

According to the insider, the “L-shaped” recovery is projected to last more than two years because of weak demand and overcapacity. The source also said that China’s economic growth will not drop abruptly given its potential, resilience and room for maneuvering.

“We shouldn’t be overly excited about some rebounding indexes, nor should we be overly panicked about some falling ones,” the person was cited as saying.

Still, the source tried to temper his unexpected candor and put a positive spin on it by saying that the overall economy is recovering, but that regional imbalances remain. Coastal areas are seeing a stronger recovery as the northeastern, central and western areas encounter bottlenecks.

According to People’s Daily, the source explained that such imbalance is inevitable along the path of economic development. Sectors with high returns usually attract more resources, but at the same time this gives rise to competition and overcapacity. When that happens, some areas utilize resources in order to innovate, while others wait for better luck. The imbalance, therefore, emerges.

Finally, the authoritative insider emphasized that an imbalance is not such a bad thing, as those regions, industries and enterprises that manage to stand out will become prosperous, while those that lag behind can draw lessons from their failures.

By Tuesday, the stock markets had quieted down. The Shanghai Composite Index ended flat at 2833 and the CSI 300 Index inched up 0.1% to 3,069.



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