There has been nothing good out of China in the past few months, which is why the call for more action by the PBOC has only grown. Despite what are really clear intentions, economists continue to look at financial operations in China as if it were still 2010 or even 2012. When the China PMI disappointed (for whatever that is worth) for December, showing “contraction” (as if PMI’s could)n or at least readings under 50, the usual commentary showed itself right on schedule.
“The manufacturing slowdown continues in December and points to a weak ending for 2014,” Hongbin Qu, chief economist for China at HSBC, said after the survey was released on Tuesday.
“The rising disinflationary pressures, which fundamentally reflect weak demand, warrant further monetary easing in the coming months.”
While the mainstream continues to look at China as China’s problem, there is the fundamental matter of its export orientation that has left the system vulnerable to extended weakness in the US and Europe (and even Japan, now that China is the largest exporter to the Japanese thanks to Abenomics). That position makes “stimulus” of whatever redistribution variety already dubious, leaving the Chinese in a precarious position of trying to transition to a more domestically-focused economy.
The primary means of doing so, especially in the context of global recession in 2008 and the global slowdown in 2012, has meant heightened monetarism. Instead of inaugurating a new Chinese orientation based more so on domestic service “demand”, as is proclaimed from time to time, they instead courted only bubbles (ghost cities and empty mega-malls being the symptoms of them).
To that end, as I have said going back to 2013, the PBOC is not in the bubble business anymore; or I should say, they don’t want to be in the bubble business but are forced to accept that they put themselves in that position by taking the orthodox path in massive doses on two occasions. The central bank has been inordinately clear on that point, yet economists fail to accept the message because it is a resounding admission of the failure of monetarism (economists prefer instead to blame the economy for not “taking” the best “aid” offered, as in the formulation of secular stagnation).
The track of China’s “markets”, including the massive rise in stocks in the past few months, only reinforces what the PBOC has been trying to work against. By cutting eligible repo collateral in half, the PBOC eliminated a huge segment of unbridled speculation in corporate credit – that is why corporate and borrowing rates have risen despite the well-chronicled “rate cut” that wasn’t. It was a two-step process whereby the PBOC was trying to ensure consistent liquidity for what have essentially been deemed “usable” or “beneficial” parts of the financial system to withstand what amounts to dramatic “tightening” directed at those speculative excesses. That stocks have surged only shows how difficult their task really is, like trying to uniformly squeeze a balloon.
In fact, that stepped process has been evident pretty much all year. As is clear from “dollar” behavior, there can be no doubt that China has been placed by the PBOC in the second stage of its “reform” process.
The yuan has devalued, quickly, rather close to its lows from earlier this year. Rather than suggest, as is usually submitted, an omniscience on the part of the PBOC, the “dollar’ behavior instead shows their commitment to “reform” and letting things go where they may; good, bad and everything else. I have little doubt that the PBOC is more than annoyed, and likely very concerned, about “dollar tightening” as a result of all this, but that is just one cost of trying to undo past mistakes of such proportions.
It has taken some time, but this “reform” idea and rejection of orthodox bubble-nomics is beginning to penetrate, if only slightly (from the same article quoted above):
However, while economists have continued to call for more easing, others question whether another round of easy credit is what China needs, given the country is still struggling to work off a mountain of bad debt and manufacturing overcapacity engendered by the last round of policy easing in 2009.
Economists will be last to figure this out because they don’t believe waste, or bubble-fueled waste, is harmful. If a bubble isn’t of “sufficient” size and contributes to harmful side effects, like sprawling ghost cities, then a central bank need only do more of the same as “aggregate demand” is all that matters to them. Demand for the sake of demand is the operating principle, but at least some of the world is starting to see just how that might be a horrible and dangerous way to command an economy. It’s at least a start until the next “evolution” where the very idea of commanding an economy is debunked probably by the next great crash. It’s good that the PBOC is at least attempting a measured reform agenda, but what is really the chances it succeeds without massive disruption somewhere along the way? Again, that is the disheartening interpretation of Chinese stocks taking over as the primary expression of “easy money.”
The PBOC has its hands full, but don’t expect them to deviate from “reform” no matter how “slow” China’s economy becomes. They have already made the conscious choice that it is better to take the slowing economy than to continue toward serial bubbles and constant wreckage. Perhaps they can export that to Japan, Europe and even the US; a depressingly sad commentary on the state of the “free” world.