Online Tools Facebook Icon Twitter Icon Google+ Icon

Share

This Is What the Chinese Regime Wants You to Think About Its Economy

05/29/2015 17:15

By Valentin Schmid, Epoch Times | May 29, 2015Last Updated: May 29, 2015 11:29 am

To many, the Chinese economy resembles a shell-game with little truth behind it. This week, the regime told the world where it wants you  to believe where the pearl is at the moment. (iStock)

To many, the Chinese economy resembles a shell-game with little truth behind it. This week, the regime told the world where it wants you to believe where the pearl is at the moment. (iStock)

In China, if the regime wants people to know something, it doesn’t have to hold press conferences, like in the United States.

It just tells the People’s Daily or another mouthpiece what to print and they will gladly oblige.

So it’s interesting to see the very same People’s Daily printing an interview with an “authoritative insider,” answering the “five most pressing questions on the Chinese economy.”

Whether or not this insider exists in real life, you can safely assume these are the five things the Chinese regime wants you to believe about the Chinese economy, whether true or not.

The interesting thing, however, is that the current assessment is not too far away from an objective look at the Chinese economy. What is questionable is the capability of the regime to achieve the goals set forth by the “insider.”

  • Growth is still reasonable: “The fundamentals of the Chinese economy are sound, as China has the world’s highest household saving rate and maximum space for macroeconomic policy maneuver … There will not be any serious problem as long as we make sure economic trends are carefully stewarded.”

In essence, this is correct, but some analysts like Diana Choyleva of Lombard Street Research, say the economy actually contracted in the first quarter of 2015. It is also true that China as an authoritarian regime has more power to manage (“carefully steward”) a potential financial crisis (“serious problem”) than freer economies.

What is not true, however, is that the management crisis will be without cost. “What they cannot do, they fundamentally cannot make bad projects good projects. If you built an apartment block in the middle of the desert and no one wanted to live there, you are going to lose money on your project,” says Fraser Howie, author of Red Capitalism.

This is tied in with the high household savings rate the “insider” lauds. People were forced to save at below market interest rates because they don’t get any retirement or healthcare benefit. These savings went into bank loans to many unproductive projects.

“By constraining the growth of household income and subsidizing production, China forced up its savings rates to astonishingly high levels. Second, by limiting the ways in which Chinese households could save, mostly in the form of bank deposits, Beijing was able to control the direction in which these savings flowed. Finally, Beijing controlled the lending and deposit rates and set them far below any ‘natural’ level,” writes Michael Pettis.

Working through the bad loans will take time and as Richard Vague estimate, could cost China as many as 20 years or subdued growth, similar to Japan (25 years and counting).

It seems, the “insider” is not too worried about slow growth and rather focused on reforms and abandoning the old model of heavy stimulus.

  • “China should concentrate on reconstructing the economy, avoid concerns about growth rate fluctuation of one or two percentage points, and under no circumstances become so anxious as to resort to strong stimulus.”

“Seen from the stage China is at right now, whether it can transfer savings to effective investment will be the key to stable economic growth,” he added.

And this is historically what China has been rather bad at; otherwise it would not have to worry about a debt bubble going bad.

The “insider” things innovation is the solution to transform financial driven investment growth into better goods and services for the consumer. As of now, China is better known for copying and stealing, rather than innovating.

  • People’s Daily writes “Current economic risks are largely under control, but we should maintain a high level of vigilance over risks related to high leverage and asset bubbles.”

As of this moment, the risks inside the system might be under control. But as Richard Vague pointed out in his research, the growth in private debt has been so high and so fast that historically all economies with a similar profile have suffered from either a currency or a banking crisis soon after.

The frantic actions of the central bank recently, however, show that the regime is indeed concerned about things getting out of hand.

The insider is confident that excess capacity in industries such as real estate can be managed as they go through a “painful destocking.” However, real estate makes up roughly 20 percent of the Chinese economy and the regime is already taking action to cushion the decline.

When asked about macroeconomic policy in general, the “insider” reiterated the focus on reform:

  • “This is not to say that we don’t want GDP—what we need is effective GDP backed by quality.”

Given the size of China’s (debt) problems, we can only wish the “insider” good luck with that.

Related posts: