China - Doing Just Enough

The story of China's economy this year has been one of "doing just enough". The step up in monetary and fiscal policy easing has been the most aggressive since Beijing's response to the financial crisis. Yet in terms of impact it really is just a case of doing "just enough" to prevent the economy from spiraling into a recession. Indeed, China had come up against a challenging combination of cyclical (e.g. weak exports) and structural headwinds (e.g. naturally slowing investment). Perhaps the best illustration is in the chart below which shows private fixed asset investment vs state driven investment - just as private investment collapsed the state rode in to pick up the slack. This is basically counter-cyclical macroeconomic policy 101. While cyclical responses can't solve structural issues, they can help to smooth out the ride, and "doing just enough" has put China into just that - a smooth patch. What that means is China wont necessarily be a massive driver of growth, but at least while it's in this smooth patch it won't be a source of volatility...