From the Mad One today:
From the government perspective, why would they pull out the big guns? Over in the consumer space, the unemployment rate remains low at 4 per cent, and spending is otherwise surging. On the latest figures, annual spending was up over 10 per cent. As with the government sector, household debt is very low.
Many commentators may dispute these figures, yet they are consistent with two things: the actions of policymakers and the fact that monetary aggregates confirm strong growth. Money demand is still rising at a solid clip — more than 13 per cent — which is a clear sign that economic activity remains robust.
So with the property sector showing signs of a recovery the government may not be as worried as the West about their own economy. If stability was under threat the Chinese wouldn’t hesitate to use the fiscal cannon. That they’re not sends a clear message.
No it doesn’t. Look under the bonnet, man. Consumer spending is still rising but on a falling trend, households debt is not the issue local government is, monetary aggregates are blooming only on the back of the share market bailout not “economic activity”, the property sector recovery is narrow and is not converting to starts because of massive excess inventory. China is using the fiscal cannon, just not all of them at once like 2009.
A much better understanding of where we are in the cycle is available from The Economist:
China is not in crisis. However, its ability to evolve smoothly from a command to a market economy is in question as never before. China’s policymakers used to bask in a reputation for competence that put clay-footed Western bureaucrats to shame. This has suffered in the wake of their botched—and sporadic—efforts to stop shares from sagging. Worse, plans for reform may fall victim to the government’s fear of giving markets free rein. The party wants to make state-owned firms more efficient, but not to expose them to the full blast of competition. It would like to give the yuan more freedom, but frets that a weakening currency will spur capital flight. It thinks local governments should be more disciplined but, motivated by the need for growth, funnels credit their way.
Fears over China are feeding the second worry—that emerging markets could be about to suffer a rerun of the Asian financial crisis of 1997-98. Similarities exist: notably an exodus of capital out of emerging markets because of the prospect of tighter monetary policy in America. But the lessons of the Asian crisis were well learned. Many currencies are no longer tethered but float freely. Most countries in Asia sit on large foreign-exchange reserves and current-account surpluses. Their banking systems rely less on foreign creditors than they did.
If that concern is exaggerated, others are not. A slowing China has dragged down emerging markets, like Brazil, Indonesia and Zambia, that came to depend on shovelling iron ore, coal and copper its way (agricultural exporters are in better shape). From now on, more of the demand that China creates will come from services—and be satisfied at home. The supply glut will weigh on commodity prices for other reasons, too. Oil’s descent, for instance, also reflects the extra output of Saudi Arabia and the resilience of American shale producers. Sliding currencies are adding to the burden on emerging-market firms with local-currency revenues and dollar-denominated debt. More fundamentally, emerging-market growth has been slowing since 2010. Countries from Brazil and Russia have squandered the chance to enact productivity-enhancing reforms and are suffering. So has India, which could yet pay a high price.
That’s it in a nutshell. My own view remains that the commodity and emerging market collapse will generate some kind of debt shock before developed markets can pick up the slack (or if they do via Fed tightening).
