China’s Tiger by the Tail

Apparently China’s policymakers remain staunch devotees of Keynesian economics and promoters and practitioners of boom bust cycles.

The Bloomberg reports,

Policy makers have cut the amount banks must keep in reserves twice since November to free up cash for lending, in a bid to insulate the world’s second-largest economy from the effects of a global slowdown. Interest rates haven’t been reduced since 2008.

New local-currency lending was 1.01 trillion yuan ($160.1 billion) in March, the People’s Bank of China said on its website after the market closed. That compared with the median 797.5 billion yuan estimate in a Bloomberg News survey of 28 economists and 710.7 billion yuan the previous month. M2 money supply climbed 13.4 last month, accelerating from a 13 percent growth in February, the central bank said.

Instead of allowing the markets clear on the outstanding imbalances brought about by previous policies, China’s policymakers have decided to keep riding the tiger's tail.

According Mises Institutes Vice President Joseph Salerno,

It has now become clear that the Chinese government has made its choice to avoid a “hard landing” by attempting to ride the unloosed inflationary tiger for as long as it can. But its strategy of massviely expanding fictitious bank credit unbacked by real savings will cause added distortions and exacerbate unsustainable imbalances in China’s real economy. As the Austrian theory of the business cycle teaches, this will only postpone the needed recession-adjustment process and will precipitate a “crash landing” that may well shatter China’s burgeoning market economy. This would be a tragedy of the first order for the entire global economy.

As pointed out many times here, the recourse towards inflationism by China’s political authorities has been seen as necessity for the survival of the incumbent command-and-control structure of China’s political institutions. A financial and economic bust will only magnify the growing forces of malcontents which Chinese authorities have fervently been trying to contain.

And given the enormous scale of malinvestments, like her Western contemporaries, China’s authorities will likely push for more inflationism until economic realities prevail or until real savings get depleted.

Reports the Wall Street Journal,

China’s real-estate sector is enormous—accounting directly for 12% of gross domestic product, according to estimates by the International Monetary Fund—and changing fast. To capture developments in the sector, data are collected from more than 80,000 real-estate developers and reported up through the county, city, and province statistical system….

A key concern for investors is China’s overhang of unsold property. A trip around virtually any Chinese city reveals hosts of half-finished tower blocks waiting to be completed and sold. Analysts fear that excess supply could put a dent in prices, and reduce the real-estate investment that is a key contributor to China’s domestic demand.

Official data show 2.98 billion square meters of residential property under construction at the end of February. Wall Street Journal calculations show that is more than two square meters for every person in China and enough to satisfy demand for almost the next three years without a single extra apartment being built.

So unproductive grand projects already highlighted by ghost cities and malls as seen in the video below (hat tip Bob Wenzel) will mount, as scarce resources will continue to get funnelled into projects that consumes capital.

Bottom line: A Tiger by the Tail by the great Friedrich von Hayek represents an allegory of the allures of inflationism

An excerpt from the synopsis of Hayek’s work by Professor Salerno,

In brief, Hayek argues that all depressions involve a pattern of resource allocation, including and especially labor, that does not correspond to the pattern of demand, particularly among higher-order industries (roughly, capital goods) and lower-order industries (roughly, consumer goods). This mismatch of labor and demand occurs during the prior inflationary boom and is the result of entrepreneurial errors induced by a distortion of the interest rate caused by monetary and bank credit expansion. More importantly, any attempt to cure the depression via deficit spending and cheap money, while it may work temporarily, intensifies the misallocation of resources relative to the demands for them and only postpones and prolongs the inevitable adjustment.

The policies of permanent quasi booms or ‘extend and pretend’ policies will eventually get exposed for the fiction they sell—through a colossal bust or “a tragedy of the first order for the entire global economy”.

For now, profit from political folly.

Nonetheless it would be best keep vigilant over developments in China.