By John Richardson
YOU will be committing career suicide if you hold on to the idea that China’s problems only amount to a lack of “old style” economic stimulus – and that a bit of old style stimulus is just around the corner.
It is essential that you therefore waste no more time by listening to analysts who still think that the worst things get, the more likely it is that the government will blink. We saw more evidence of this kind of thinking yesterday when analysts predicted “more easing measures” following the release of disappointing purchasing managers’ indices.
One of the potential easing measures analysts identified was another cut in interest rates.
Sorry, but this just seem to add up. The interest rate cut, which was announced on 21 November, was not about boosting growth. It was instead about easing the debt burden of companies as economic reform accelerates.
The cut in the cost of borrowing was accompanied by a widening of the range of deposit rates that banks can offer. This is a key step towards full liberalisation of the banking sector, as was another very important government announcement over the weekend: A draft plan to force banks to provide their own deposit insurance.
Widening deposit rates that banks can offer is about forcing lenders to more aggressively compete for funds from savers. This is designed to make banks exercise much better due diligence on lending.
And the deposit insurance scheme, in effect, says to lenders: “You will eventually be on your own and can and will be allowed to go bust if you continue to make bad loans. The implicit guarantee – that the government will always come to your rescue – is going to disappear.”
There is nothing short of an economic revolution taking place in China right now, which is pretty much experimental in nature – as was Deng Xiaoping’s earlier economic revolution that began in the early 1990s.
Deng’s revolution worked, but it could have gone wrong.
Xi and Li’s revolution will work in the long run, I think – but you cannot discount the possibility that it will go entirely wrong.
At the very least, this will not be a smooth transition and will involve lots of trial and error, as the potential pitfalls of bank liberalisation neatly illustrate. There will also be short term compromises to keep enough people on board, but these compromises will not indicate that the overall direction has changed.
Domestic economic growth has to be much lower as this transition takes place – and “real growth” could quite easily slip into negative territory over the next few years.
If you still don’t buy this argument, which I have been making for several years now, you don’t have to listen to me. Instead, just listen to the government.
Last week, for example, government researchers announced that:
- Government stimulus has resulted in $6.8 trillion in wasted investment since 2009.
- In 2009 and 2013 alone, “ineffective investment” came to nearly half the total invested in the Chinese economy during those two years.
The very fact that they were allowed to announce this shocking data is a sign of the iron-hard resolution of Xi and Li to complete their reforms. They are, in effect, saying to the Chinese people and the rest of the world: “What we did before didn’t work and so has to change”.
The same message has been behind the government’s much-greater openness about the scale of its environmental challenges.
The slowdown in growth that we have already seen in China is one of the triggers for the new global financial crisis (GFC) that I discussed yesterday.
There is a second “China factor” behind the new global crisis, which The Financial Times highlighted in this article on deflation yesterday.
I don’t believe that the FT went far enough. Whilst it recognised that China would “export deflation”, via its huge manufacturing surpluses, it viewed this not as a deliberate policy, but rather only really happenstance – an unintended consequence of the credit binge.
That’s right, yes. But I think China will also be forced to export deflation as a policy measure. Gaining greater share of export markets will enable it to preserve job as growth at home continues to slow down.
As the Great Unwinding gathers pace, we must also not forget about how the impact of commodities, bought by China, that have been warehoused. Once they are sold, this will add to downward price spirals in chemicals, copper, aluminium and other commodities.
Pessimistic? No, realistic I believe – and realism will keep you in work.