Wrong once again about China’s smoking economy
We have been saying for some time now that China’s economy is in for a hiccup. We haven’t been right yet, as low-cost exports, massive building of China’s infrastructure, and creation of a large middle class keep supporting a phenomenal growth rate of GDP. Of course China’s rather lax lending policies have also supported that growth, to date without a day of reckoning. China’s most recent numbers are even more robust than its two decade track record of nearly 10% GDP growth. This itself is unprecedented in the history of the modern world.
China’s GDP grew at 11.3% in the latest quarter, and the Chinese government is concerned (WSJ):
[D]ays after China announced sharply accelerated economic growth for the second quarter, its central bank moved swiftly to head off overheating, sucking money out of the banking system and allowing the yuan to trade higher against the dollar.
The People’s Bank of China said Friday it would require commercial banks to place more of their deposits at the central bank, meaning banks will have less money to lend out for investment. It was the second time in five weeks that the central bank has raised the so-called reserve requirement.
At the same time, the Chinese yuan on Friday hit its highest level against the dollar since its one-time appreciation of 2.1% exactly one year ago. And Beijing took another step toward allowing Chinese banks to invest capital outside the country, part of a strategy to help reverse a huge inflow of money that threatens the country’s economy with overheating.
Earlier in the week, China announced its economy in the second quarter of this year expanded 11.3% from a year earlier, accelerating from 10.3% in the first quarter and raising growth to its fastest level in more than a decade. The surging expansion is being driven by money flooding in from record trade surpluses. The cash ends up being lent out by banks, fueling an investment binge that could lead to a crash if it ends up resulting in overcapacity, falling profits and bankruptcies.
Chinese economists and government officials addressed the question of what to do about the phenomenal and accelerating growth of China and the impending slower world economic growth ahead, and had various responses for the People’s Daily. Their ideas seem to focus on creating a slower growth path for China, emphasizing domestic spending and incomes policies. However, keep in mind when you are reading their ideas that China depends on exports for 70% of its growth, so it is unclear just how much tinkering with domestic policies can achieve — at a minimum it is an unknown:
[S]ome foreign countries have raised their interest rates to control the liquidity of currency. The world economy is likely to slow down next year. China’s exports will be the first to be baffled, which will trigger a series of effects.
Talking about this issue, many people will ask: First, with such a high savings rate, what else can we do if not to invest? Second, with such a high production capacity as a result of active investment, what else can we do other than export? Indeed, a high savings rate will lead to a high investment rate, and a high investment rate will lead to a high export rate. This will result in a rapid economic growth. To stop this cycle, we must firstly address China’s high savings rate. We should notice that currently both residential savings rate and government and enterprise savings rates are rising significantly. The government and enterprises have both obtained excessive share from macro-income distribution and then converted them into investment capacity.
Therefore, in the final analysis, this is a matter of distribution. The fundamental way to solve the problem is to improve China’s macro-income distribution structure and increase the residential income share. At the same time, efforts should be made to adjust the expenditure structure of the government and enterprises. The government should increase its input in social security and public utilities, whilst the enterprises should shoulder their social responsibilities.
Wei Jianing: It is not a good thing to have the economy growing all the way up. China should be determined to pursue some macroeconomic regulation to resolve some long-term problems. We have been talking about implementing both stable fiscal policy and stable monetary policy all the time. But could we change the method? We should give a specific definition to “stable” and clearly stress, (for monetary policy) to transform from a neutral monetary policy to a contracting monetary policy; for fiscal policy, to regulate local financing acts and allow local governments to issue bonds, so as to alleviate the pressure on commercial banks and the government. Meanwhile, to adjust the financial expenditure structure and enhance the input in social security, education and medical care and to encourage residential consumption.
Hua Ruxing: The government should work hard to complete three transformations in fiscal policies. Firstly, it needs to transform from an expanding fiscal policy to a slightly contracting fiscal policy. Secondly, to transform from a construction-oriented expenditure pattern to a public-oriented expenditure pattern so as to enhance the input in social security, education and medical care and to encourage residential consumption. Thirdly, to transform from an urban-oriented financial service policy to a large-scale financial policy which also serves the rural area.
We have no doubt about the resourcefulness of the Chinese people when it comes to solving the problems that may arise from slower growth. However, it will be a challenge when it occurs, since the country has gone so very long without so much as a serious pause in its breakneck growth. It is harder to correct problems when you haven’t been through them before. In addition, China’s bad loans — whether they are $1.2 trillion or a mere $400 billion — become much more problematical in a time of declining growth.