Analyzing the Chinese economy for many people involves trying to carve out intellectual space that allows them to refute all other deeply held beliefs about how economic exchange and basic mathematics functions. An astounding number of people ignore all market data falling back on tired clichés that in some manner pay homage to the Great and Powerful Beijing’s ability to skillfully manipulate a profoundly complex economy of 1.3 billion people.
Goldman Sachs, in predicting the coming bull market as the Chinese stock market was collapsing, wrote that “China’s government has a lot of tools to support the market.” Gavekal largely joins GS writing that “it will be clear that the present weakness in the market was actually a buying opportunity. The main reason is that in China, market sentiment is driven as much by government policy as by liquidity – and there are powerful reasons why Beijing wants to see a bull market.” There is essentially no other reason given to buy than we think Beijing is omnipotent. Call this the Communist stock market version of “this time is different.”Call this the Communist stock market version of “this time is different.”
The Gavekal separation from factual economy analysis continues when writing that “Beijing is pursuing transformative economic reforms, which promise a greater role for market forces and less direct management of the economy by organs of the state.” Even before the recent suspension of any semblance of a market, I would respectfully ask: what reforms? The entire continued focus of economic policy is to increase fixed asset investment and channel subsidized credit to politically favored firms while restricting private markets. The only potential tangible reform, Shanghai-Hong Kong Stock Connect, was designed to increase capital flows into the stock market which could, as history has shown us, become trapped. Economic analysis of the Chinese economy has widely fallen prey to a type of Party conditioned Pavlovian response that ignores data and the basic of economics.
While many read official NBSC press releases about top line economic data and lament that GDP growth slowed from 7.1 percent to 7.0 percent, a statistical measurement error in an economy of 1.3 billion people, all underlying data and official reaction indicate much more profound reason for worry. To provide some perspective, I have calculated the value of economic or financial market support measures announced by Beijing in approximately the last six to eight weeks.
According to my calculations (taken from sources here, here, and here) China has announced market support in the past two months totaling approximately $692 billion. Now as with any announced stimulus or government support financial aid, and specifically in China, there are some important notes. First, this is only based on press releases and news articles of official numbers. It is assumed that these measures specifically are targeted, short term, and will be completed but also recognizes it does not count unofficial or unannounced flows such as lending from state owned banks.
Second, this is not necessarily new money. For instance, the mandated provincial debt bailout takes the form of a forced debt restructuring rather than new money. Third, this does not cover soft capital less quantifiable announcements such as reductions in the reserve rate and official interest rates designed to increase lending, liquidity, and cut capital costs. However, if we include just additional cash stimulus from cuts to the reserve ratio and their estimated impact, this would increase total market support by RMB 1.5 trillion. This would bring the total market support announcements in recent history to a staggering $933 billion.
Leaving disagreements about data quality, Beijing’s omnipotence, or market movement aside, all of this data invites a fundamental question and challenge. If this relative data was provided blind (removing the country name) to any economist with the question does this represent the characteristics of an economy slowing from 7.1 percent to 7.0 percent, would they answer yes or no? There is not one economist or analyst that could say with any shred of intellectual honesty that this is characteristic of a healthy economy reducing expected GDP growth by 0.1 percent. Forced government debt restructuring, stock market support to prevent firms from defaulting on debts, near trillion dollar stimulus packages, and central bank asset purchases to prop up prices are not the characteristics of a growing economy.
To put these measures in perspective, the official stimulus package in 2008, absent bank leverage, was only RMB 4 trillion. The measures outlined above total approximately RMB 5.8 trillion. In other words, official support measures are now almost 50 percent higher than during the 2008 global financial crisis. The TARP program in the United States in 2008 only purchased $426 billion of assets. While these headline numbers omit key details and should not be used as a straight comparison, it is instructive in informing us about the underlying economic problems that so many refuse to acknowledge the seriousness with which Beijing is approaching the downturn.
I may be old fashioned and out of step but I believe that facts and economic fundamentals ultimately matter. This time is not different and even Beijing cannot continue to ignore that laws of economics forever. Focus on the actual data and not the press releases to see what the data says. It isn’t a pretty picture.