As if it needed further reinforcement, the actions of the PBOC follow a simple script – huge monetarism doesn’t work and is ultimately harmful. That is why “reform” in China is being turned into something unrecognizable to the world’s stock investors especially at a time when China’s economy is expressly vulnerable. Only a week or so ago, China’s researchers issued a report that emphasizes what amounts to the basis for this disparity.
“Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8tn in wasted investment since 2009, according to a report by government researchers.
In 2009 and 2013 alone, “ineffective investment” came to nearly half the total invested in the Chinese economy in those years, according to research by Xu Ce of the National Development and Reform Commission, the state planning agency, and Wang Yuan from the Academy of Macroeconomic Research, a former arm of the NDRC.
Monetary “stimulus” is synonymous with waste and arbitrary redistribution, but almost $7 trillion should open more than a few eyes. Orthodox economists, even Paul Krugman, acknowledge the tendency to waste but I doubt they appreciate the sheer scale of it. If they did they wouldn’t be jetting around the world blaming “austerity” for the forming global recession already biting through Japan and Europe – and taking square aim at the U S of A.
While the “investment” in waste performs up to Keynesian standards of nothing but short-term considerations, as GDP “benefited” from producing all this economic detritus, the dominant economic theory holds no balance sheet. In other words, GDP is not the sole determination of future growth potential. Whereas monetarism and its fiscal Keynesian cousin take no note of the future, “waste” plays an outsized role in the ultimate economic trajectory – it is hard, after all, to grow an economy over the long run with nothing but steelmills (sadly, I am only partially joking).
We know that intimately with the housing bubble here in the US, and now China and the PBOC are left trying to manage past indiscretion in favor of temporary GDP boosts. The problem with sullying your economy on debt-driven waste is that such debt “requires” squaring at some point.
Banks’ bad loans jumped by the most since 2005 in the third quarter as the nation heads for the weakest economic expansion since 1990. Soured credit accounted for 1.16 percent of outstanding loans in the third quarter,data from the China Banking Regulatory Commission shows.
About 80 percent of those surveyed said bad-loan numbers may have been “significantly” or “slightly” understated, according to Orient Asset Management. Those who said the actual ratio may be above 2 percent accounted for more than one-third of those surveyed while another one-third of the executives said it may be 1.5 percent-2 percent.
The Chinese have figured out that the flood of orthodox monetary measures may lead to a temporary boost to GDP, but ultimately the accumulation of waste is the downside bubble that everyone fears but no-one will openly and publicly admit. In other words, the PBOC is acting out their empirical assertion that QE (and monetarism like it) doesn’t just fail to work, it is a huge negative over time. That is why it is clear, to me, that the PBOC can “shock” by tightening at this point – bubbles are the priority as central banks shift from trying to create a recovery they can never succeed in gaining to managing the inevitability of that failure. The worst part about this version in the string of serial credit-driven bubbles is that there was so little growth to any of it anywhere.
Having admitted the problem, central bankers all over the world are terrified (in private) of the consequences (what was Bullard attempting to do?).
Common sense may finally be intruding at long last, certainly as credit markets prepare for something wicked, but be careful not to wake stock investors from their dreamy infatuations.
