Platt Perspective on Business and Technology

China and its transition imperatives 29: rethinking China’s economy and the Party and government policy that shapes it 5

Posted in macroeconomics by Timothy Platt on March 9, 2016

I have been offering this series as an essentially open-ended effort to narrate and analyze China and its government and economy, as that country enters into and proceeds through a period of fundamental change and uncertainty. I add that this is not necessarily a change that either China’s government or its Communist Party leadership desire or in any way control. In fact part of the reason why this is shaping up to be as profound a transition as it is, is that China’s leadership and in both government and Party do not either desire or control any of it, and because their responses to it have been so reactive – and particularly when they have tried to get in-front of it to act proactively. And I continue that narrative here with this installment (see Macroeconomics and Business, postings 154 and loosely following, and that directory’s Page 2 continuation, posting 201 and loosely following for other regular and supplemental installments to this series.)

I offer this posting as a direct continuation of Part 28: the most recent prior main sequence installment that I have added here, and Part 27.5: my most recent quick-addition supplemental installment as added to go live on January 10, 2016. (I note the publication date of that posting to put this one into a proper timeframe perspective as events in China are developing at a rapid pace, and certainly for the issues and challenges that I would address here. I am actually writing this to upload to the blog server on January 23, 2016.)

At the end of Part 28, I stated that I would continue its discussion here, and I start doing so by picking up on a detail that I only briefly noted in that posting. I noted that Beijing’s air quality tends to rise and fall according to the seasons, and with that more cyclical pattern superimposed on a general ongoing longer-term upward trend in the overall levels of air pollution faced. Then I went on to continue my discussion of industrial, electrical power production, and vehicle pollution in China. But I left out one crucially important piece to understanding their urban air pollution challenge: home heating. One of the primary seasonal drivers of reduced air quality in China, and certainly in its larger and more densely populated urban centers can be found in how so many of these urban dwellers heat their homes – with the pollution generating burning of a range of combustible fuels. When the weather warms up and those home heating systems are shut down, they no longer contribute to this problem so China’s urban air quality improves, at least for this more cyclic contributor to the overall problem. And when the weather turns colder, home and I add business heating becomes a major contributor to air pollution and to a degraded air quality again.

Now let’s add China’s vast urbanization project to this mix where the intent of both their one political Party and their government is to relocate a vast proportion of their overall population into urban centers like Beijing, until half or more of all of their people are urban dwellers. According to this paradigm, Greater Beijing’s overall population would approach some 100 million people, in and of itself! And in the winter, all of their homes would need heating. And all year long, all of them will have to cook their meals, and also over heat sources that burn fuel. This all has very significant environmental impact potential, that I am sure to return to in future discussion.

• When political ideology and ideologically driven and shaped planning and intent, overrule all else in what is done and where and when and how,
• Reality and real world consequences will with time have their say as to what of that works, and what of it does not and cannot.

I have been writing this series in large part in terms of decisions made and actions taken and consequences already reached. I note this air quality point as simply one more piece to a larger puzzle, looking forward to longer-term consequences of policy trends that are still taking shape and still early in their enactment, and for consequences to come. If China’s leadership is to become more proactively effective in managing their economy and in meeting the needs of their peoples, they will have to set aside their ideological blinders – and their grand scheme national development visions that are shaped and formed by them. They will have to plan and prioritize in terms of actual needs and actual consequences. That, ultimately, is the only way that their leadership: Xi Jinping included, can move past their current reactive response trap.

I said at the end of Part 28, that I would “finally turn to address the macroeconomic policy and practice of quantitative easing there too, as initially promised several installments ago in this series.” I am going to at least begin addressing that here, but first I am going to add a brief relevant note to this narrative, in follow-up to a point that I added to my Part 27.5 supplemental posting. I stated there that “on paper at least they (n.b. China) are still a growing economy, and even if that means growing at a slower (roughly 7%) rate, which is still very good.” I pick up on that discussion here by very specifically focusing on two words from this statement: “on paper.” And I respond to this assertion, as initially taken from China’s official government pronouncements, by making an assertion of my own, which I offer without qualifiers or other add-ons that would give me an out if it proves wrong.

“Roughly 7%” annualized economic growth, or rather 6.8% growth as officially stated, is only slightly below the officially predicted 7% growth rate that China’s government was officially projecting, and right up to when their economic downturn became so overtly visible with their first big stock market sell-offs. But the actual number there, and both for the second half of 2015 and certainly since their economy began to overtly collapse is much lower. And since their initial stock market collapse, it is at best, approximately 0%. And in fact their overall economy has been shrinking and even fairly significantly so over the past few months.

• China’s overall import of petrochemicals and industrial commodities has significantly collapsed, and their industrial output has too, and not just in their highly inefficient state owned and run businesses.
• And public confidence in China’s economy, as evidenced by their ongoing stock market performance and a range of other metrics, has dropped as well.

Their economic growth has leveled out and in fact dipped into negative numbers; their economy is shrinking. And with that noted, I finally do come to the questions of what China’s government is doing in the way of quantitative easing, to try to buffer and protect their economy and their government and Party system from this complex, far-reaching calamity.

First of all, what precisely do I mean by quantitative easing? I begin addressing that by quoting the opening lines of the Wikipedia definition of this term, as offered as of this writing:

• “Quantitative easing is a monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. This differs from the more usual policy of buying or selling short-term government bonds to keep interbank interest rates at a specified target value.”

The key element of this assertion that I would at least start with here, is that quantitative easing is a monetary policy in which a government, or in this case China’s government and controlling single political Party seek to “stimulate the economy when standard monetary policy has become ineffective.”

Judging by the policies and practices of most developed world national governments and their central banks, much of what China has traditionally done in maintaining its economy would qualify as nonstandard. But let’s focus here on the terms offered in the rest of that quotation. What has China been doing that would more closely fit the terms of that definition? It has been flooding reserve funds into its public stock market and into the companies, state and private-owned, that offer stock shares there, in an attempt to keep them from going into freefall. Why is China doing this, and particularly for companies that have no outside, foreign investors where their participation would shine a bright light on this aspect of the overall economy? Why aren’t they just turning on the printing presses and expanding the volume of Renminbi in circulation to cover this roughly one trillion US dollars and growing, worth of market investment? If they tried that and word of it got out, which it absolutely would with the International Monetary Fund’s recognition of the Renminbi as a key global currency, then the exchange rate value of that currency would drop through the floor. The dynamics of Gresham’s law would see to that. So as a part of their quantitative easing efforts, China has been spending down its hard-earned and studiously saved foreign currency reserves and at a furious rate, and both to shore up their financial and other business institutions and to keep their currency from going into freefall.

Am I correct in this assessment? Time will tell. China does in fact have real strengths and capabilities, but their government and their one Party that governs it have to make some really fundamental changes away from their version of business as usual if they are to avert the types of worst case scenarios that this posting and the immediately preceding ones in this series would suggest. In anticipation of that, I will continue and expand upon this posting’s brief start to a discussion of quantitative easing, Mainland China-style. I will also at least start a discussion of how China’s policies and actions are impacting upon the outside world and on the global economy. Their stock market is, for example, closed to outside investment and this would protect foreign investors as individuals and foreign national economies as a whole from direct negative impact from a collapse there. But, on the other hand, as of this writing world oil producers are producing an excess of some one million barrels of crude oil per day and every day, that China would have been expected to buy. And China’s across the board drop in commodities purchasing has had significant impact on the businesses and industries that have geared up to meet China’s expected needs, and that now face excess capacity and business development costs that they cannot readily recoup through sales, from having built up this productive capacity. Public opinion and the wildcard factor of emotion enters in there too, of course. And to add one more area of intended discussion here, I will delve into the issues of transparency and opacity in government policy and practice as China seeks to control its economy from an authoritarian center. I will simply note here, that both approaches can best be considered two edged swords, and that their contexts of use and points of use are crucially important.

I have only scratched the surface of what I was thinking of exploring in this ongoing story here, and will continue its discussion in a next series installment. Meanwhile, you can find this entire series and all of its postings at Macroeconomics and Business as postings 154 and loosely following for Parts 1-12 and for a supplemental posting: Part 12.5. And see Page 2 to that directory for subsequent main sequence and supplemental installments to this. You can also find other, China-related postings and series at those directory pages, and at Ubiquitous Computing and Communications – everywhere all the time too.

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