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Week Ahead: a test for the Chinese strongman

The market's relentless search for direction moves to China this week, with investors nervously awaiting figures on the strength of the economy.

Week Ahead: a test for the Chinese strongman

China, the world’s aspiring strongman, steps up to the strengthometer this week.

Financial markets will judge whether figures about the health of China’s economy, which will be filtered out over the course of the coming week, are cause to panic about the broader global outlook.

Last year it was China’s high inflation, but this year the country’s faltering growth – by the nation’s own standards – has sat alongside the eurozone crisis and US economic doubts at the top of investors’ list of reasons to worry.

The Chinese central bank’s surprise move to cut rates on Thursday – the second consecutive month it has done so – added to fears that GDP data to be published on Friday (alongside industrial production, retail sales and investment numbers) will be weak.

Even before the shock provided by the rate cut, economists expected GDP growth to fall to 7.6% in the second quarter of the year, from 8.1% in the first three months, as a result of weak exports and manufacturing. The decade of double-digit growth is certainly long gone.

If the numbers come in any worse than markets’ cherished consensus it could re-ignite latent ‘hard landing’ fears for China (roughly defined as below 7% annual growth) and dent global investor sentiment.

Investec analysts sum it up well in their preview of the week: ‘Whilst the market has, to an extent, come to terms with this already, the risk is still that a soft out-turn reminds markets of the threat that a Chinese slowdown could pose.’

Inflation is, however, expected to fall (figures due on Monday), which coupled with slowing growth will reinforce hopes that the People’s Bank will cut rates again.

Japanese conundrum

Asia’s second biggest economy, Japan, could also act to stimulate the economy next week when the central bank’s policy board meets on Thursday. Policymakers are battling against a strong yen and the fallout from the eurozone crisis.

Economists are divided on whether the Bank of Japan will add to the exiting QE programme – Kiyoko Katahira of Société Générale notes that the bank is behind on fulfilling its current round of asset purchases; not the first time the Bank has failed to delivered on its promises.

Fixing the eurozone and stimulating America

It’s a relatively market-sensitive calendar for the US and Europe. On Monday, European finance ministers meet to finalise some of the proposals made at the EU leaders' summit at the end of June. They will reconsider Ireland’s adjustment programme and look at how the EFSF/ESM bailout funds can be used to stabilise markets.

On Wednesday the Federal Reserve’s FOMC rate-setting committee publishes the minutes from its latest meeting. Investors will be looking for signs that more stimulus may be on the way.

In the UK a raft of data will be published on Tuesday with numbers on industrial production, trade, the RICS house price report and the BRC retail sales report.

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