As Barack Obama delivers another impressive speech in America and Mario Draghi in Europe generates another impressive rally through targeted short-term bond purchasing, policy makers in China are seemingly working on some pretty impressive stimulus plans of their own.
After months of doom and gloom – some of which has finally caught up here in the form of declining ore prices and a raft of project cancellations from major companies – it seems that political leaders are doing what they’re supposed to do and leading where the economy won’t. After months of waiting, bold reforms are outlined, fresh ideas generated and new hopes are emerging.
Yet beneath the soaring rhetoric and the market intervention, concerns are already being raised that what we’ve been offered are, again, merely short-term fixes.
While short-term fixes – like the doctor who prescribes a Band-Aid and an aspirin to a hypochondriac – are often as good as anything else, the concern is that the world’s economic imbalances are still so great, five long years after the credit crunch, that political jawboning and monetary policy won’t nearly be enough. Band-Aids, the argument goes, need to be replaced by tourniquets and aspirin by morphine.
There are hopes that stronger medicine, thus, is about to be administered in China, whose economic policy makers are rarely known to do things by halves. And leading up to what appears to be the 18th Communist Party Congress in mid-October, signs are emerging of concerted fiscal stimulus efforts across multiple projects and multiple provinces.
But just as Western efforts look flimsier at second glance, there are indications too that Chinese stimulus may not be all it’s hyped up to. Despite arguments that Beijing needs to placate its citizens through gleaming infrastructure and strong economic growth, the reality of haphazard construction and unequal wealth distribution suggests otherwise. And despite the announcement of a string of development projects at the municipal and provincial level – forming, in aggregate, a multi-trillion Yuan pipeline – credit, manufacturing, freight and steel production data suggests that these are for all intents and purposes still the dreams of mid-ranking bureaucrats.
If anything, China’s new Politburo is likely to announce stimulus of a very different kind: true, long-term reform to welfare, internal migration and healthcare, evidenced by the equally urgent challenges of rural unrest, urban unemployment, soaring living costs and demographic imbalance.
This, of course, would be wonderful for China’s people, unlike the sticking-plaster solution of further urban construction and fixed-asset outlays, such policy reform won’t restart the iron ore mines of the Pilbara or the investment banks of London and New York. And whereas China’s mammoth 4 trillion Yuan stimulus package in 2008 came in response to a crashing global economy, today the main concern is not whether Greece will exit the Euro, whether the United States will face a fiscal cliff or indeed whether Australian miners will have to sack a lot of workers, it’s whether the deteriorating cash-flows and capital productivity of the uneconomic boondoggles that 2008’s stimulus first wrought will damage China’s financial system or create a solvency crisis for heavily-indebted local governments.
Turning to analogies of Chinese medicine, China over did it on the stimulus during 2008 and now, with a case of severe indigestion, it needs not more of the same but the fiscal equivalent of herbal tea. Such natural remedies aren’t likely to provoke the adrenaline rush that markets have become so addicted to since Alan Greenspan first stimulated the US out of the dot-com crash and post-9/11 crisis however, so while China will most likely make a full recovery, the world’s other economic patients are unlikely to get much benefit.
Several months ago I agreed with the consensus that there was a strong likelihood of significant Chinese stimulus in the second half of 2012, but the country’s political economy has since changed in profound ways. Ostensibly, the same people are in control and the same priorities are pursued, but China’s reformists have gained the upper hand in Politburo jockeying, with Bo Xilai’s political purge followed by the side-stepping of Hu Jintao ally Ling Jihua for a position at the top table.
Since that time too other policy constraints have presented. Capital outflows are hindering central bank operations, while rising pork and petrol prices are stoking fears of inflation. As local government revenues decelerate on falling land prices, and state-owned companies seek early rescue packages and bad debt refinancing, the only policy tool left in the kit – to paraphrase economist Andy Xie – is propaganda.
Despite having ample funds at its disposal and the ability to quickly discharge bold initiatives, it beggars belief to think that China will add to its woes by compounding a fixed-asset overhang, a capacity utilisation glut or a potential non-performing loan crisis through conventional pump-priming and roads to nowhere. Building on the lessons of Japan and the Soviet Union, it appears increasingly likely instead that China’s new guard will turn crisis into opportunity through a wholesale rebalancing to sustainable consumption and wealth redistribution, tackling at the same time rising challenges of chronic disease and ecological damage.
This, after all, is what China’s leadership says it wants. And though we may, perhaps selfishly, hope for otherwise in Australia, this non-stimulatory kind of economic stimulus looks like what China will deliver.
Michael Feller is an investment strategist at Macro Investor, Australia’s independent newsletter advising on stocks, trades, property and fixed interest. Macro Investor is running a series of specials on how profit from the end of the mining boom. Take up your free 21 day trial today.