Blundell-Wignall: China’s stimulus days are over

From the always excellent Adrian Blundell-Wignall today at the AFR:

In the early phases of economic development, authoritarian governments can more or less “buy” economic growth. Asia did it in the run-up to the 1998 crisis…In effect, “costs” — such as providing capital to new workers moving from the countryside to the cities — are recorded as economic growth. But this tooling-the-workers process eventually ends. And it is impossible to continue writing credit like that indefinitely.

…In market economies, structural reforms and market discipline generate strong productivity growth (profitability), which takes over from the chequebook-growth phase. Company investment comes to be funded by retained earnings. Credit begins to take a back seat (other than for working capital).

…Over-investment always results in falling returns — that’s just basic economics. The return on equity  for Chinese listed companies has been sliding ever since its peak just prior to the crisis. The receding tide of this average is exposing a host of zombie companies that can’t make their cost of capital. Just like Japan in the 1990s, they need bank support…Reminiscent of the Japan and Asia crises, financial stresses have begun to emerge. Already some regional banks have either failed…China has reached a dangerous inflection point…

Any way you look at it, China is going to slow from here, via reform, crisis or stagnaton.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. I prefer the Macro narrative that China is not stimulating now because various sectors (property, etc) are holding up quite well and the Marxist obsession with unchecked inflation as the root of all unrest and revolution is a greater concern for them at this point in time.

    The recent bank failures being perceived as necessary evils to signal a broader move toward a more mature and market orientated approach to management of bad debts. However unexpectedly dangerous that might turn out to be in the end.

      • No, China does not love inflation. China is scared of inflation.
        Inflation was a factor behind the Tienanmen incident.

        • Gramus but is that because back in those days the Chinese people (who are good savers) had the money under the mattress? Whereas now it’s in wealth management vehicles in sketchy banks that are government guaranteed* to grow at 5%?

          * if you protest hard enough, maybe?

  2. haimona12MEMBER

    With this these tweaks, Australia also fits the authoritarian economic model — ‘such as providing capital [tools, houses, roads etc] to new workers moving [from overseas] — are recorded as economic growth.’

  3. John Howards Bowling Coach

    I have a large network in China, the reports on the ground are that their economy is in deep poo. Not only that, their government is deeply involved in re-nationalising the recently developed private industry. It is not only giants like Alibaba who have been acquired by the CCP. Smaller private producers are now being forced to accept CCP staff and forced to transfer shares of their businesses to the CCP. It’s heavy pressure stuff and they are being told if you love your country you must do this to signal that you are a patriot. It will end badly, more capital flight and more of the exodus of industry into South East Asia etc where new factories are set up in the Chinese diaspora support. Chairman Xi is pushing too hard and is going to burn all he thought he had, as without money the rest of the world will promptly grow tired of China and their lies. The world discovers soon enough that place is a diode, the money only flows one way. The consumer markets of China are in fact really small and already been fought over by the whole world in the mistaken belief that there are a massive and growing number of Chinese longing for their wares and services. The reality is a value trap and even those like VW and BMW etc who are selling volume, have had to partner with the CCP to make their cars there and transfer 100 years of know how to their competitor. If you do have something they actually want, there are already 500 locals working on a counterfeit version of your whole business.

    • agreed. But the danger is in their decline. Faced with losing control, desperate leaders do desperate things.