Is China at the bottom? Probably Not.

From: A Cheaper Yuan Won’t Help China


“…What’s really driving downward pressure on the yuan are capital outflows as Chinese investors look to get their money out of the country into safer havens such as the U.S.; by some estimates, $1 trillion has left China since the middle of 2014. One can hardly blame them. Despite the regime’s promises, economic growth remains weak and surplus capacity prevents new projects from getting started. Access to capital for everyone but state-owned enterprises is difficult at best. Domestic companies are reluctant to invest in new products given China’s weak record on intellectual property rights.

Chinese investors don’t trust the regulatory structure to protect them and fear advertising their wealth, lest they attract the attention of the regime’s anti-graft investigators. Meanwhile, foreign investors feel targeted by inconsistent investigations and opaque laws; they’re not about to fill the void left by fleeing Chinese capital.”

For several decades now it seems Western economists and analysts have fallen all over themselves to crown China’s policy-makers as great geniuses, with some even envying their system of communist-market melding.   But in the midst of their entire boom and now obvious bubble and emerging bust, it has always been a crass, centrally planned Maoist economy with markets only allowed to move in directions that served the purposes of central  planning objectives.    Of course, Western economic and market intelligentsia have been virtually brainwashed with a higher-education indoctrination that believes in the unlimited  merits of the right kind of centrally-planned economic intervention.  Just look at the near worship of Central Banks  / The Fed and all the calls for Government intervention to rescue or stimulate the economy, etc., if you don’t believe.

Adds Chris on his own blog, “…It is an enormous mistake to think that a lower RMB will kick start the Chinese economy and restore peace and justice to the universe to grow at 10% annually again. Simply won’t happen.”

True enough, but for more reasons that Chris notes.  Fundamentally, this is the Great Ponzi of China, with resources misdirected to economic activity that registers A+ on the Neanderthal GDP calculation that is universally accepted despite making few amends for discerning between activities that are genuinely sustainable due to real, live and unforced-by-legislation consumer demand, vs highly wasteful projects such as the infamous empty cities of China.   Those intervention-inspired activities once drove economic activity wild in China.

As an aside, we should consider that such intervention was not only from Maoist China,  but also coming from massive Fed liquidity injected into the U.S. that supported massive external deficits going back to the 1990s that, in turn, funded massive investment into the manufacturing explosion in China.  That, in turn served to undermine the comparatively bloated and egregiously regulation-hamstrung U.S. manufacturing sector, further encouraging China’s policy  makers to reach for the stars.

Consequently the price of commodities, especially building related items such as concrete were driven through the roof.  Padded to unsustainable levels were corporate earnings activities by the likes of the now teetering CAT, whose sales collapse has been an 18-month depressionary signal if ever there was!  Meanwhile, the mercantilist monetary and credit expansion policy they pursued to gin things along only bloated the export sector into the stratosphere where it would soon enough run out of oxygen as demand from elsewhere hit its ceiling in concert with Western consumer’s debt loads amid their own nations’ consumer lending sectors tightening credit standards amid the implosion of 2007-2009.

Nonetheless, to a modern policy maker, every economic problem looks like a nail to  the neo-Keynesian Monetarist at the ready with his policy hammer.  Hence, amid since that inevitable bust and contraction revealed in earnest in 2007,  central-bank-created/enabled credit has flooded into the sovereign markets mopping up the fiasco by the tens of $ trillions, as well as into the global corporate credit markets under the long-held fallacy-belief that bloating money supply / credit always jump-starts a failing economy.   Well, yeah – if you’re foolish enough to believe that any activity = good activity.  But, not so in action, even if we look at the results through the lens of expanded credit at the Fed vs. actual GDP return on investment compared to previous eras.  Simply, the efficacy of the Monetarist solutions to even gin up crappy GDP has plummeted!

That is the simple result of decades modern-economic policy that when distilled is revealed as nothing more than crass, Keynesian raiding of the economic seed-corn so to politically distribute it mixed in with the annual harvest.  Such always gives the impression that the harvest is dramatically healthier than it really is, while masking the reality that the depleted seed-corn results in declining harvests that are then perversely supplemented by ever increasing raids into the seed-corn.   It is why when Keynes first promoted his theories, sound economists decried it as nothing more  than faux-scientific window dressing on the long discredited policy swindle that is inflationism that is always embraced by looters in government and banking.

Only a astounding fool believes such policy will create bounty rather than inevitable famine, yet that is the policy our authorities pursue at home and in China.  It is the policy of self-preservation to the present political and financial elite, but it is simply unsustainable.