Wall Street has come to a consensus about China in 2017 — here’s why it’s likely very wrong

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Wang Xiaoyu giving a model a haircut near his barbershop in Changsha, in China’s Hunan province, in 2009.
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REUTERS/Stringer

A recent report from China Beige Book, a survey of the Chinese economy, is challenging Wall Street’s prevailing notion about China in 2017.

It all hinges on one word: stability.

The expectation on Wall Street is that since the Chinese Communist Party will be holding its 19th National Congress – a process in which the party chooses its top leadership positions – in 2017, President Xi Jinping will want to keep the economy stable so there’s no distraction from his relentless effort to consolidate power.

“The Chinese leadership will likely face significant political uncertainty both internally and externally, and in response they will likely place social and economic stability as a top priority throughout 2017,” a Credit Suisse research team led by Vincent Chan wrote in a recent note. “We believe the government will adopt pro-growth measures to boost economic growth ahead of the political transition.”

That, the thinking goes, means that the government will provide the most dangerous part of the economy – massive, indebted quasi-state companies – with enough cash to continue powering through the year and that it will support banks so they can support the corporate sector and the country’s gross-domestic-product growth. Things will stay stable. Nothing to see here.

The problem with that is it seems as if that’s not the stability the Chinese government really cares about.

Words

What the Chinese government really cares about is employment. Unemployment leads to social unrest, and social unrest makes Xi look bad. (In China, it’s always politics first and economics second.)

Now, as China Beige Book points out, net hiring looks good in China, as 43% of firms hired, up from 30% this time last year. These measures are looking good even after the government stopped juicing the economy in the first quarter of 2016. (You’ll recall that the beginning of 2016 was somewhat rocky.)

“If the jobs picture deteriorates later next year, then Beijing is likely to respond forcefully,” the China Beige Book report said. “But even an effective response will not take effect immediately and its effects, as always, will be transient. The stability the Party wants is a solid but not certain bet. The stability investors want is a crapshoot.”

What all this means is that the country has no reason to put its foot on the gas the way it did early in 2016 unless the jobs picture really gets bad.

Xi already told a group of Communist Party members of the economic and finance group last week not to worry if they didn’t hit their target of 6.5% GDP growth (down from 6.7%). In fact, he told them not to try to hit it if doing so would create too much risk.

Xi is not scared of a slowdown; he’s more scared of the unrest that unemployment and a full-blown debt crisis could bring.

That means investors worried about growth can’t be sure the government will help them along. Some companies may very well be losers. We’ve already seen 55 corporations go bankrupt in 2016, up from 24 in 2015.

So be careful: One man’s bankruptcy could be another man’s perfectly stable, healthy-enough economy.