Can’t Shake off a Bad Habit: Chinese Government Announces “Mini” Stimulus

The mainstream’s drivel about Chinese political leader’s promised “market reforms” has just hit a roadblock. The government simply can’t get rid off a bad habit to begin with.

From Wall Street Journal: (bold mine)

China's government, concerned that the economy is faltering, said it would target more spending to boost growth, but it left unanswered a question over whether monetary policy will be eased as well.

China's State Council, the government's executive body, unveiled Wednesday a combination of spending moves to rev up China's economic engine. They include additional spending on railways, upgraded housing for low-income households and tax relief for struggling small businesses. China had previously included these measures in its economic work plan for 2014 but hadn't before put them together in a package aimed at boosting gross domestic product.

The package was announced just as growth appeared to be losing steam. China has set a target of economic growth of about 7.5% for this year, below the 7.7% recorded last year and well beneath the levels of recent years. This year's first-quarter economic data have been disappointing, and analysts expect economic growth in the period to be somewhere around 7%, compared with a year earlier...

Open ended or smaller than 2008 stimulus?

The government was short on specifics about how much new spending would result, but it wasn't expected to be anything close to the four trillion yuan ($650 billion) stimulus package rolled out in late 2008 to offset the effects of the global financial crisis. That stimulus plan helped China rebound rapidly from the global downturn. China grew 9.2% in 2009, a year when the global economy fell into recession.

Why "short on specifics"? Could it be because what has been perceived as “mini” (today) may balloon to be as big as, or even become bigger than 2008? Don't forget the article mentions that the stimulus plan have "helped" the Chinese economy "rebound rapidly", so why stop at "mini"?

But, but, but…a 2008 Déjà vu will only magnify China’s already precarious conditions, again from the same article

But the government spending was accompanied by a huge increase in credit, as state-owned firms borrowed heavily to build real-estate developments, infrastructure projects and other ventures. Now many of those projects are having problems paying off their loans, and steel, concrete and other industries are laden with overcapacity. Much of new lending is going to rolling over new loans, rather than finance healthy projects, according to some analysts, cutting into China's potential growth.

Articles like these can be confusing due to their self-contradictions. 

 

Nonetheless I recently discussed about the risks of a global Black Swan from China’s massive debt burden seen in both the formal banking and the shadow banking system  that has functioned as repercussions to the 2008 stimulus. 

So aside from the recent bailout of a delinquent Trust product, the announced stimulus is a sign of how hooked to debt, the Chinese government has been. Yes, solve debt problem with even more debt. Reforms? They are most likely political rhetoric or promises meant to be broken.

The Chinese government realizes that with 90% of Chinese households exposed, a collapse in the real estate sector compounded by banking and shadow banking system  will likely lead to political upheaval. China’s credit bubble expressed via property bubbles has signified as unintended consequences of her financial repression policies.

So bailout via stimulus means to kick the political can down the road.

Any wonder why China’s brinkmanship approach with her neighbors over territorial disputes? Nationalism can divert or swing people's attention from national political economic woes to foreign issues. And every government knows that the xenophobic nature of nationalism has the effect of rallying people around the government.

Lately Chinese stocks have been buoyant due to expectations from a new or repackaged stimulus despite reports of mini bank runs in a rural area. The Shanghai index fell .74% today apparently in a “sell-on-news” reaction. 

And like almost everywhere, bad news is good news for stocks due to one simple reason: central bank-government implied guarantees.

Yet interesting to see how the so-called ‘mini’ stimulus will work to forestall the escalating feedback mechanism between unsustainable debt levels and a slowing economy.