China uses the true genius of forward guidance in economic reporting

The true genius of forward guidance has not been to provide clarity but to manage expectations. When former Fed chairman Ben Bernanke announced that one of the major tools in his arsenal is forward guidance, vast majority of the analysts didn’t even consider as a tool but as time went by the true genius of the tool became apparent along with its true power or ability, which is to perfectly blend with the financial market and provide support to the other tools of the central banks around the world.

The reactions in the financial markets these days and the volatility generated largely takes place on forward guidance rather than on actual actions. For example, the euro declines immediately on the suggestions of further easing, while many a time bounces back after the actual action. The traders’ game of ‘buy the rumor; sell the news’ became so apparent and everyday phenomenon thanks to the forward guidance. The central bank of Japan (BoJ) has used this tool long before the crisis under a different name called the verbal intervention, which was not as successful as the forward guidance, though the principal remained similar.

Now, China has started using the same principle, only in the reporting of its economic future. Yesterday, we shared Credit Suisse arguments that price growth in China’s housing sector has been slowing down but when these data were released financial market reaction was a mute one as because officials already commented that the days of big price rises are over. Now they are doing the same with economic growth, employment, investment goals, and trade.

According to China’s state news agency, Xinhua, Xu Shaoshi, head of the National Development and Rural Commission (NDRC) said, "Great difficulties remain in meeting goals for investment and trade………Currently, the foundations for stable economic development are not solid enough and downward pressure remains large, with difficulties hard to underestimate."