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Sluggish Chinese growth causes irrational decision making

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China’s economy has been steadily booming over several decades but recently they’ve experienced a decline in growth. In a knee-jerk reaction to this trend, Chinese officials are now seeking to implement a massive government stimulus plan to encourage Taiwanese investment on China’s mainland. The Asian Times reports on the implications and motivations behind the recent move:

Four Chinese state banks will offer up to US$95 billion in credit to Taiwanese investments in business on the mainland, the director of Beijing’s Taiwan Affairs Office Wang Yi told a conference in Xiamen, Xinhua has reported.

The move is part of a limited domestic economic stimulus program targeting infrastructure projects and consumer staples and including attempts to ensure lenders’ liquidity in order to free up capital for investment and job creation on the mainland.

…China’s purchasing managers’ index (PMI) for June has fallen to 48.1, the eighth consecutive month of decline, and tying the August 2008 and March 2009 slump, which was the longest on record. (The 50 level is neutral and anything below it signifies economic contraction).

The flash reading is based on 85-90% of responses to the survey of over 400 small and medium-sized enterprises (SMEs). The government PMI, focusing larger and state-sector companies declined to 50.4 in May from 53.3 in April after six consecutive months of expansion.

SocGen economist Yao Wei, as quoted by MarketWatch, expects at least two more months of PMI decline for the HSBC index. A new government directive to banks to relax restrictions on lending to infrastructure projects was in the news on Wednesday. Nevertheless, the bellwether Shanghai Stock Exchange Composite index fell to a three-month low just above 2,250 on the PMI news. Such centrally mandated investment will not help SMEs to recover.

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