A recurring theme of these economic times is that we are told that we are in a recovery but central banks keep acting as if we are in a recession or a depression. Another example of such behaviour came yesterday as the People’s Bank of China (PBOC) cut interest-rates for the third time in only six months. It was only on the 21st of last month that the PBOC relaxed reserve requirements for banks in another move aimed at easing monetary conditions. As these moves build up they are beginning to look like the decadent western imperialists in 2008 are they not? Indeed the headline from the Financial Times today ramps up such thinking.
China rate cuts aim to hold line against deflation
Quite extraordinary language for an economy that we are told is growing at an annual rate of 7%! We have discussed on here before that fact that these days central banks will ease monetary policy in spite of expected economic growth being solid such as the Riksbank in Sweden. This makes one wonder if central banks believe the official numbers along the lines of 2% economic growth being the new zero. But of course China has a published rate of economic growth that far exceeds that. What are they afraid of?
What about interest-rate rises?
I pose this question as other parts of the world are promising interest-rate rises admittedly at some indeterminate date. Both the US Federal Reserve and Bank of England are offering “Forward Guidance” that interest-rates will rise but are looking ever more like the girl and boy who cried wolf. Whilst these two continue their dance of teases and promises we see quite a bit of the rest of the world engaged in monetary easing. The Bank of Japan and the ECB lead the charge with massive QE purchases but last week alone saw interest-rate cuts in Australia and Romania added to an ever-growing ledger. Indeed you could argue that the latest interest-rate move from China merely catches up with last week’s move by the South China Territories.
Also whilst I was typing this Serbia joined the party by cutting interest-rates by 0.5%.
Isn’t the economy doing relatively well?
If we go back to the PBOC report for the end of 2014 then things were apparently responding to what it calls “Implementation of a sound monetary policy”. Indeed numbers like these below seem to back that up.
In 2014 GDP growth was 7.4 percent year on year and the consumer price index was up 2.0 percent year on year.
One might reasonably think that the Chinese economy would have received quite a boost from lower oil prices especially if we consider this below. From Reuters.
China’s crude oil imports hit a record of almost 7.4 million barrels a day (bpd) last month, putting it ahead of the United States’ estimated imports of 7.2 million bpd for April
However China does have a track record of stockpiling raw materials as it has showed in the past with commodities such as Iron Ore and Copper. Of course whilst Iron Ore if no longer at the lows a price of US $61 per tonne is much cheaper than it was providing another stimulus.
Also China has pushed ahead with expanding its power supply according to Project Syndicate.
The country’s power system is now the world’s largest, capable of producing 1.36 terawatts, compared to the United States’ one terawatt.
Indeed it is in the middle of quite a green power revolution.
Electricity generated by strictly green sources – water, wind, and solar – increased by 20%, with the most dramatic growth occurring in solar power generation, which rose a staggering 175% (in 2014).
However as discussed in the comments over the weekend storage remains a big issue from green sources of energy.
Of course if things are going so well we then have a problem, why is monetary easing needed?
China’ stock market
As ever this part of the financial economy is singing along to DJ Pied Piper.
Enter the dragon……..
We’re lovin’ it
Lovin’ it, lovin’ it
We’re lovin’ it
The Shanghai Composite equity index has risen by 3% this morning to 4334. It was not so long ago it was dicing with the 2k level and is up a giddy 115% over the past year. Perhaps thats what the FT means by deflation a 115% rise?!
China’s housing market
The situation here is rather reminiscent of the housing boom in Spain except on a larger scale as we seem considerable over-supply. Indeed we move from discussion of empty towns to empty cities. Friday’s Guardian covered the subject thus.
He went to Tianti, in Zhejiang province, by accident getting off a bus at the wrong stop, and found a series of empty high-rises and office blocks so quiet he could hear only the wind and his own breathing. The buildings “all appeared to be crisp and new, inside they were dark cavities, devoid of inhabitants and interior fit-out”.
According to the article this is all fine and healthy but as it was such a bad week for the Guardian critiquing that view seems like kicking someone when they are down so let’s move on.
The scale of the over-supply led the IMF to estimate that it would take until 2020 for it to be used up. I remember reading a month or two ago that Goldman Sachs were estimating that it would take eight years if one also allowed for property that was still being constructed.
What about the debt?
Housing booms invariably come hand in hand with debt booms and this has been true in China too. It is private-sector debt which has boomed here leading Forbes to estimate China’s total level of debt at 280% of GDP compared to the 331% of the United States. if the housing stock is in substantial oversupply then there will be issues too for the debt which finances it and it now backs. This is a familiar cycle in the credit crunch era and has an ominous portent if we look at what has so far followed.
The People’s Daily Online tells us that this time it is different.
The recent interest rate cuts were regarded as normal anticipatory adjustments and fine-tuning, and should not be read as the type of QE used in countries that have witnessed zero interest rates, analysts say.
Mind you its denial that QE is being used in China reads rather like an admittal.
The PBOC will continue with its monetary policies such as RRR cuts, rate cuts and liquidity injections, but QE is not the correct term for its framework of monetary easing, as its balance sheet has never stopped expanding and will not suddenly jump due to asset buyinglike that of the the U.S. Federal Reserve (Fed), the European Central Bank (ECB) and theBank of Japan (BOJ).
If this all looks rather familiar then the truth is that it is. To stay with the official view you need to take the Matrix style red pill and maybe not just one! Meanwhile once you start to go down the rabbit hole you look at what happened to us and think this about the monetary policy moves. From Newt in the film Aliens.
It won’t make any difference
As evil capitalist imperialists we slashed interest-rates and pumped money into our economies or at least we tried too. But in the initial phase we saw interest-rate rises which only tightened the economic noose around our necks. The PBOC has found itself having to tell banks to stop raising deposit rates contradicting one of its own reforms and repeating our experience.
Thus we see that China has a slowing economy and on the Bloomberg indicator growth has slowed to 6.4% but we fear that should it see its own credit crunch then we will see much worse. Meanwhile never believe anything until it is officially denied. From the People’s Daily.
Kevin Rudd (ex-PM of Australia), president of the Asia Society Policy Institute, has rejected the argument that China faces the prospect of economic collapse, saying it lacks a rational basis. He says he is”still relatively optimistic” on China’s growth pattern, and expects China’s growth rate to remain above 6 percent over the next decade.