China's Monetary Stimulus: Not Enough For An Economic Rebound
CONTRIBUTOR
I connect the dots between the economy and business decisions.
China’s central bank announced that it is cutting interest rates by 25 basis points along with a 50 basis point reduction in reserve requirements at banks. These actions should stimulate both demand and supply of bank credit. The actions were reported by The Wall Street Journal which referenced a statement on the People’s Bank of China website. (I could not find the statement on the English language page, but it appears on the Chinese language page. Google is happy to translate for you.)
Economic growth has slowed in China, according to official statistics. And those statistics are almost certainly giving an overly rosy spin on the data. Comparing variation in the quarterly data, the Chinese economy fluctuates only one-third as much as the U.S. economy. (I computed the standard deviation of growth rates since 2011 divided by the average growth rate. U.S. variation: 0.32. Chinese variation: 0.12.) Either the Chinese economy is inherently more stable than the U.S. economy, or Chinese statisticians are more pliable.
Chinese economic activity is decidedly weaker according to a number of other measures, including rail car shipments and electricity usage. Even beer demand is down. I track U.S. exports to China as reported by our Commerce Department. Exports are down but not out of line with historic fluctuation over the period of China’s rapid economic growth. Most analysts see China’s growth as running between four and five percent rather than the official 6.9 percent figure. A few suspect China is close to recession.
The quarter point cut in interest rates won’t, by itself, turn the tide. However, it’s a step in the right direction. Longer term the country needs to rely more on market forces and less on political edicts, but that change won’t fix the current problem.
The country’s capital investments are not all justified, meaning that the debt behind those investments won’t work out. With substantial debt across the economy, that’s a major concern. On the positive side, the Chinese people have saved a great of their earnings. They need substantial savings because of the weak social safety net in the country, but they also have the means to keep spending. The country’s foreign trade partners continue to expand, though not as rapidly as in past years. My conclusion is that China will avoid a recession but has another year or 18 months of low growth as it gets past the consequences of its overbuilding.
For a good background piece on the Chinese economy, watch Tyler Cowan’s video.
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