China Endgame, Again

Ludwig Von Mises explains China's endgame.
True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.
The essence of a credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment.
What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse.
If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Global Times: Beijing needs proactive stimulus policies to shield economy from worst of trade war
China is in a critical period of stabilizing its economy. One decade after the global financial crisis, the Chinese economy is again facing uncertainty and challenges under internal and external pressure. It may be that China can't overcome these difficulties by simply continuing to fine-tune its economic policy. To maintain a stable trend in economic development, strong measures must be taken to support growth.

China will adopt more proactive fiscal measures, such as tax cuts, to help businesses affected by the trade conflict with the US, Chinese Finance Minister Liu Kun has said.

Total tax cuts for 2018 are expected to exceed 1.3 trillion yuan ($189 billion). The country will also study more large-scale tax reductions, Liu said in an interview with the Xinhua News Agency.

...Apart from steps China has already announced to reduce business costs, the country needs to draw up more policies to reduce taxes and support the real economy. Liu's comments about large-scale tax cuts are timely and necessary to ease investors' concerns. The questions are: How soon can those measures be taken and how proactive will the policies be?

In 2008, the Chinese government announced a 4 trillion yuan stimulus package to fight the impact of the global financial crisis. Now, the Chinese economy is under even tougher pressure amid escalating trade friction. Beijing must draw up strong stimulus policies to inject new momentum into the real economy.
I'm no advocate of big deficit spending, but of all the types of deficit spending that exist, structural changes to the tax system are among the least destructive for the economy. China needs efficient capital allocation, not a new round of infrastructure investment. China avoided an endgame in 2008, in 2011 and in 2014, each time finding there was plenty more room for centrally-directed credit investment. Can they do it again?
Global Times: China GDP to grow 6.2% in 2019: IMF
Maurice Obstfeld, Economic Counsellor and Director of the IMF Research Department, stressed during an IMF press conference on Tuesday that the trade dispute China is currently having with the US will negatively impact the country's GDP growth next year, although such a negative influence will be offset by Chinese authorities' efforts to stabilize the economy.

The IMF forecasted that China's GDP growth will be 6.6 percent this year, the same forecast in April.

Liu Xuezhi, an economist at Bank of Communications, told the Global Times on Tuesday that the trade war will have an "evident" impact on the domestic economy.

"It is likely to drag back the mainland GDP by 0.1 to 0.2 percentage point for this year and next year. And if the trade disputes worsen, the drag will widen to 0.4 percent to 0.5 percent," Liu said.

...But experts said the Chinese government has the capacity to minimize such impact with the launch of more stimulus policies, especially policies to boost domestic consumption.

The People's Bank of China announced on Sunday to cut the reserve requirement ratio (RRR) by one percentage point from October 15.

"It's possible that the PBC will launch more RRR cuts before the end of this year," Liu said.
Some economists forecast a hit to consumption in 2019 because of social security reform.

Social Security Change Could Cause Layoffs and Shave 1.5pc Off GDP in 2019
Chinese SMEs Can Only Survive Through Tax Evasion, Social Security Reform Could Be Killer

Lower taxes are needed to offset tight financing conditions and a coming hit from back taxes, since many SMEs and their employees have dodged social insurance taxes for years.

FT: Will China’s stimulus prove a boon for emerging markets?
Jean-Charles Sambor, deputy head of EM debt at BNP Paribas Asset Management, said a move by China to deliver more stimulus would be “positive news for the emerging market macro story”.

“It means there’s a low risk of a hard landing . . . so imports should remain quite strong, commodity prices quite strong, and therefore any pass-through would have a positive impact on . . . commodity exporters.”

China, for example, is the biggest destination for Brazilian exports, and there are already signs that other EMs are benefiting as the country grapples with economic growth that slowed in the second quarter to a pace last seen in 2016.

Li-Gang Liu, chief China economist at Citi, said China previously bought a lot of oil and gas from the US, but said that was “cut to zero” in August. Meanwhile, in the area of agriculture, “if you look at the price differential between soyabean prices in the US and Brazil, Brazil is now 25 per cent more expensive”, he added.
Missing from most discussions about China is its inefficient capital allocation. During a rising credit cycle, everything looks good because debts are financed. Only when the tide reverses will you see the true extent of malinvestment.

The dollar is a problem for China, but even if it abandons the dollar, the yuan will devalue against real assets. Major economic reform is the only way out, but major economic reform entails giving up political control over the economy. The behavior of the CCP indicates it prefers political control to economic reform.

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