Recently, the People’s Bank of China reduced the benchmark interest rates by 0.25 percent, marking the sixth reduction in just a year. Additionally, bank reserve requirements were lowered by 0.5 percent.
China’s economic growth has been on a downward trajectory over the past few years. While the reported GDP stands at 6.9 percent, this figure should be viewed skeptically. Even so, a growth rate of 6.9 percent falls short of the expectations set by Beijing. Urgent measures are needed.
To stimulate demand, central bankers often rely on low-interest credit. This approach might temporarily enhance government statistics, but given the already saturated state of China’s economy, what is the true aim of the People’s Bank of China with these measures?
Beijing’s policies of extensive credit creation have led corporations throughout China to accumulate substantial debt. Unfortunately, the usage of these funds has not always been fruitful, resulting in investments that do not yield returns. Simply put, much of the borrowed money has gone toward failing ventures.
Currently, corporate debt in China has reached a staggering $16.1 trillion, which represents 160 percent of GDP. This figure is not only the highest corporate debt in the world but also double that of the United States. So, what benefit arises from extending additional cheap credit to these heavily indebted corporations?
Consuming Credit at a Loss
Chinese businesses now face the challenge of rising debts alongside dwindling profits. Attempting to alleviate profit deficits by increasing production only exacerbates the issue, as higher volumes cannot compensate for lost profits.
The structural issues in China’s economy further complicate this landscape, particularly the prevalence of state-owned enterprises (SOEs), known for their inefficiencies. The government backs these entities, allowing them to continue borrowing even amid losses.
In fact, a considerable portion of bank lending in China is directed toward these government-run firms. As a result, this latest round of monetary easing is unlikely to stimulate job creation or economic growth. Instead, it merely reduces borrowing costs for SOEs, enabling them to linger a bit longer in their stagnation.
Moreover, cutting short-term interest rates could prompt further speculation in the stock market. Despite the Shanghai Composite Index experiencing a drop from over 5,000 to around 3,000 between early June and late September, it has rebounded by approximately 400 points. Perhaps the lower rates will rekindle the enthusiasm among Chinese investors.
But what does this accomplish? Will rising stock prices genuinely enhance the economy? Can they encourage investors to feel wealthier and, in turn, spend more money?
Constructive Simplicity for China’s Communist Party Plenum
This week, the leaders of China’s Communist Party will convene for their plenum—a meeting where they assess their collective approach. Among various objectives, they aim to propose a five-year plan to reduce the state’s influence on the economy.
Jia Qingguo, associate dean at Peking University, noted, “The next five years will be crucial for restructuring the economy. The traditional methods of managing the economy are increasingly facing barriers.”
What strategies will emerge from this meeting? Will they lay out a methodical plan to gradually lessen governmental control? Could there be measurable targets and protocols for missed goals, including detailed reports with data visualizations?
From our perspective, such complexity appears to waste valuable time. Elegance often lies in simplicity, while convoluted approaches tend to lead to chaos.
In the spirit of constructive simplicity, we propose some unsolicited advice to China’s Communist Party:
- Cease the support of state-owned enterprises.
- Avoid manipulating the yuan.
- Refrain from stimulating the economy through continual interest rate cuts.
- Do not interfere in the stock market.
- Stop promoting the construction of ghost cities.
Perhaps then, China could achieve the economic restructuring it seeks.
Sincerely,
MN Gordon
for Economic Prism
Return from Constructive Simplicity for China’s Communist Party Plenum to Economic Prism
