As we know, there have been three large scale reform and stimulus periods in China since 2011:
- 2012 reform to lower investment and higher consumption.
- 2013/14 higher investment and lower consumption.
- 2015 reform to lower investment and higher consumption.
- 2016/17 higher investment and lower consumption.
- 2018/19 reform to lower investment and higher consumption.
- 2020 higher investment and lower consumption.
Although this looks pretty damning in terms of wild policy gyrations, it has not been without progress. The consumption share of growth is higher today than in 2011. And there have been important structural legacies such as local government bond markets, deleveraged developers and yuan liberalisation.
Still, what is most obvious about it is that Beijing has never had the cojones to stick to its own policy objectives and prescriptions. It has always panicked in the end, broadly speaking because its legitimacy has, until now, rested upon the pedestal of growth.
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But that is changing. For a few years now, martial wolf warrior attitudes have dominated Chinese external relations. We are seeing a lot more direct meddling in various strategic markets as well, such as that of iron ore. These are all stoking and attaching to the CCP a new wave of Chinese nationalism.
And at home, over the past few months, we’ve witnessed the CCP rediscover socialist roots with massive redistributive policies unleashed upon billionaires and markets. More at Caixin:
Since the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China held in October, five shifts have taken place in China’s mid-and long-term development philosophy. These include the shift from growth rate to security; from efficiency to fairness; from early prosperity for some to common prosperity; from capital to labor; and from real estate and finance to science, technology and manufacturing…
In response to changes in the external and internal environment, China is making strategic shifts that indicate a reversal of the capital-labor relationship. At present, there is a labor shortage and a capital surplus, hence we are seeing the fiscal and taxation policy adjustments on real estate, the antitrust campaigns in the industrial sector and the intervention in intergenerational education inequality caused by the wealth gap.
As the Chinese economic aircraft loses altitude again owing to this new reform program, the question is is it enough to stop Beijing from panicking when growth falls to the pace of a developed economy (or below)?
The signals remain steadfast. Indeed, yesterday, the CCP addressed the issue directly:
The Chinese Communist Party has a new catchphrase to guide its economic policy, a “cross-cyclical” approach that government advisers say means taking action sooner, in smaller steps and with a longer time frame in mind.
It’s a departure from counter-cyclical policy, which is when central banks and governments add stimulus to spur a slowing economy — like cutting interest rates or taxes and boosting infrastructure investment — and tighten when growth starts accelerating.
Officials haven’t outlined what “cross-cyclical” policy entails, but several economists with links to the government say the objective is to take action that’s preemptive and moderate in order to smooth out fluctuations in growth.
It implies keeping restrictions in place in some areas, while easing up in others. That was highlighted recently by the central bank cutting the reserve requirement ratio for banks to boost liquidity, but tightening property restrictions to rein in prices.
…A cross-cyclical approach suggests authorities are considering economic performance over a longer time period when deliberating policy tools, according to Zhang Xiaojing, deputy director of the National Institution for Finance & Development, a state think tank under the Chinese Academy of Social Sciences.
“Policy makers will look past volatility at present, and aim to make sure the economy stays on track over the next two to three years,” said Zhang. That’s reflected by the slower pace of local government borrowing so far this year. An acceleration toward the end of the year will help drive the economy when momentum further weakens at the beginning of next year.
A longer-time horizon also explains why China has recently cracked down on Internet platforms and after-school tutoring firms, and why it’s pushing ahead with policies to reduce carbon emissions, boost births and increase urbanization.
Authorities will make more forward-looking adjustments to the economy, like cutting the RRR to provide liquidity even before economic data showed a slowing momentum, according to Zhong Zhengsheng, chief economist at Ping An Securities Co. Ltd., who consulted with Premier Li Keqiang last year.
“The central bank went ahead of the curve” because policies usually have a delayed effect on the economy, Zhong said. Another cut in the reserve ratio is likely before the end of this year, even though the central bank will probably refrain from lowering policy interest rates, he said.
Authorities will cut their reliance on large-scale fiscal and monetary stimulus, and “use smaller quantities of policy to achieve the goal of smoothing out economic cycles,” said Zhong.
Hmmm…call me skeptical. Why?
Because small moves are precisely what China has done in every other slowdown period to prevent boom and bust cycles. The problem is that China has an inverted balance sheet which means its economy is either all expanding at once or all contracting at once, with overshoots both ways.
A fancy new label for old policy moves doesn’t change anything, though it does suggest some determination to avoid more stimulus is still present, along with the structural changes from previous reform cycles.
So, a stimulus is still not coming meaning that growth will crash ahead. Does Beijing have the gumption to finally see a reform cycle through that?
I’ll believe that when I see it.