I cringe every time I hear
uber-capitalists that permeate the airwaves marveling at Chinaâ€™s economy and successes in averting an economic
meltdown that has hit much of the rest of the world. China, like Japan in the late 1980â€™s, is some sort of miracle.
When capitalism is working China is the best at the game, selling cheaply
manufactured goods to the rest of the world while modernizing the domestic
economy with the proceeds. When capitalism is not working like in the
last 20 months, China is the best at command economics â€“ efficiently spending government
treasure to produce a domestic demand-led economy to offset the export-led
economyâ€™s collapse. China, we are to told to believe, is far better at getting
money to shovel ready projects than the US, UK or Germany where governments have none of the insights and
efficiencies that the Chinese Communist Party and government bureaucracy has at
its disposal. After all the CCCP has a long history of efficiency in
Sense any sarcasm?
Well if you donâ€™t than I stink at getting my message across. China published new money supply data today for the month
of June and it surged 28.5% y/y (M2) up from 25.7% in May while bank lending
soared with yuan loans up 34.5% y/y to record level and up from 30.6% in
May. Getting an auto loan in China today is about as hard as it was to get a mortgage
in the US without any proof of income or employment in
2006. If China has any record on bank lending it is not a pretty one. The government
can easily make banks lend and people seem willing to borrow but getting paid
back is something that is not imbedded in the culture nor is credit
Also China reported Q2 foreign reserves (FX) and it surged
$177.9bln in the month to $2.13trln compared to $7.7bln increase in Q1.
Keep in mind this comes at a time when trade is under severe stress suggesting
capital inflows are running full blast into China â€“ officials are absorbing foreign currency from
speculators eager to buy Chinese assets â€“ the government calls this hot
money. Even in Hong
Kong the real estate market
is starting to go up again (never really went down).
Chinaâ€™s GDP for Q2 is out Thursday (later tonight for those of us in the US east coast) and is expected to show 7.5% y/y growth
up from 6.1% in Q1 and the government has all but promised an 8% rate of growth
If this were happening in
the US, the IMF would be all over it crying foul and one can only imagine what
airwaves would be filled with â€“ hyperinflation is around the cornerâ€¦already on
this track until US June payrolls silenced this chant.
Even the PBOC seems to be
increasingly uncomfortable with the money awash in the banking system and
unlike the rest of the world being lent by banks to the public (households and
firms). In recent weeks PBOC officials have been speaking publicly about
inflation risks ahead and the need to move early to avoid spike in the price
level. Earlier today the PBOC announced to a handful of Chinese banks
that they would have to buy CNY100bln ($15bln) in special bills in September to
reduce amount of funds banks have to lend ahead. While as a share of
money in circulation this is a drop in the bucket, but symbolically it is
significant as it is the first sign the authorities are considering taking the
jiu bowl away.
Meanwhile the domestic
political problems plaguing Chinaâ€™s leadership is another source of strain on the
government and may prolong any reasonable attempt to rein in the money supply
(when Hu Jintao left G8 early to return to address unrest in northwest Chinaâ€™s Muslim minority region says it all). China also recently cancelled a shipment of coal from Australia when the ship was in the South China Seaâ€¦very unfriendly gesture and a slap in the face of
contract law. Could it be that the new normal for the world also implies
a new normal for China and sustaining past rates of growth and investment are no longer
realistic without causing huge distortions like an exploding money supply and
giant sucking sound from massive foreign (speculative) capital inflows?
China is decoupledâ€¦yes hearing that one once again.
If the world is depending on
a China-led recovery to compensate for the anemic rebounds in developed
economies like in the US and Europe, then it will be one disappointing outcome as China could well prove as inept at command economics as it
has throughout its post-1949 history. Let 100 Flowers (Green Shoots)
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