Please calm down

As the Olympics draw to a successful close, financial industry China-watchers are obsessed by two stories. First: China's growth is about to slow dramatically, either as the result of global recessionary trends or because of a post-Olympic hangover. Second, the government is about to step in to counteract that slowdown with a massive fiscal stimulus package.

Our advice is: calm down. China's economy is basically in fine shape. There are a few downside risks but policy makers have plenty of monetary and fiscal weapons in their armory to combat those risks if they materialize. On the fiscal front, we would not be surprised if government spending rose sharply in the second half of the year. This is because revenues grew by 33% yoy in the first half. At this rate China is headed for a budget surplus of Rmb600 bn or more than 2% of GDP. Not spending this surplus would amount to a fiscal contraction. Spending some of it, which is what we expect will happen, makes good policy sense. But it should not be considered a stimulus, because the government will simply be putting back into the economy money it has already taken out, not adding to aggregate final demand.