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Monday, 23 October 2017

On China and growth

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Anthony Peters on Beijing’s bread and circuses, 25 years after Tiananmen Square.

Are we growing or aren’t we growing? Is China the engine for global economic expansion or a drag on all our houses? The HSBC China Manufacturing PMI, released this morning, doesn’t tell us a lot.

Like all such diffusion indices, once they get into the 49s and through to the 51s it is a matter of statistical error as to whether they are in expansion or contraction mode. According to the stats, the Chinese economy has been in contraction, albeit of a minor nature, since January of this year but it could, rounding errors accounted for, be in expansion.

Forgetting the 7½% annual GDP growth target for moment, it appears clear that the government is unhappy with things and is in stimulus mode. The PBoC has been regularly injecting liquidity into the market in order to keep things afloat. In the past two months alone it has injected some Rmb165bn (US$26bn) into the money markets which has in turn pushed money market rates down by something in the region 210bp in the 14-day repo, of 95bp in the 7-day repo and of ¾% in 1 month Shibor. That has repos around 3¼%-3⅜% and Shibor at 3⅞%.

On top of this, there is talk of the PBoC setting itself up to implement a bond buying programme which is, in all but name, quantitative easing.

I am not asking for China to abandon its race for growth but when the point is reached where it becomes growth for growth’s sake, when a 7½% GDP target becomes nothing more than the opium of the masses, then I have to wonder. I am wondering…

Has the time now finally come for us all to get out our black suits and black ties and the attend the funeral of our dearly lamented friend, the economic cycle? Are we condemned to live in a world where anything other than growth and expansion is to be outlawed? Are economies no longer allowed to find their natural equilibrium and is “rebalancing” a word which is going to be added to the list of politically incorrect vocabulary?

I would have thought that economies correct to the down-side when they have over-expanded, got ahead of themselves and when they try to naturally return to the trend growth line. I think it was during the Greenspan presidency of the Fed that the idea first struck that if the economy was growing above trend, then rather than tightening monetary policy in order to correct the trajectory, one simply decided that trend growth had to be pegged higher. This shift in philosophy enabled the central bank to leave rates unchanged and for growth to carry on unhindered.

The result was a policy of growth at all cost and an acceptance by the populace that, whenever there was a sign of weakness, irrespective of what level it set in at, stimulus would be on its way. “Shrink to Fit”, a policy which I have long supported, never stood a chance.

Sure, we went through a horrid recession in 2008 and 2009 but the bubble economy had been floating along on not much more than a cushion of credit. In 2008, the shock of being threatened with having to return to balanced budgets and living within one’s means was so severe to be politically untenable and reflation on credit became the default option in order to keep the “canaille” off the streets.

Now 25 years after Tiananmen Square – I suppose nobody under the age of 35 will be able to remember those unbelievable and utterly unforgettable pictures of the young man on his own halting a column of tanks – the Chinese government has learnt that “panem et circenses” translates very well into Mandarin.

Please don’t get me wrong. I am not asking for China to abandon its race for growth but when the point is reached where it becomes growth for growth’s sake, when a 7½% GDP target becomes nothing more than the opium of the masses, then I have to wonder. I am wondering.

In Europe, on the other hand, the slide towards Quantitative Easing – negative interest rates and renewed LTRO are near neighbours living in the same street but not the same house as QE – has nothing to do with opium for the masses. The creeping of Japanification of Europe has been upon us for months if not years and it might be that in the long run the ECB’s strenuous denial thereof will eventually come home to roost. However, the eurozone has been proven right in terms of its handling of the currency crisis – if you close your eyes tight enough for log enough it might go away.

Does that tell us more about the authorities’ success in dealing with the problems or about the way in which markets very quickly become bored with being bearish?

Right or wrong, I still can see no sound reason to try to cash out and to take too many chips off the table. Long is and for the while remains the new neutral.

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