Chinese Premier Li Keqiang Punctures The Keynesian "Excess Savings" Myth

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

For two decades now mainstream Keynesian economists have been gumming about China’s remarkable economic boom and its accumulation of unprecedented foreign exchange reserves. The latter hoard has now actually crossed the $4 trillion mark.

But this whole narrative is PhD jabberwocky with a Wall Street accent. What the People’s Printing Press of China has been doing is simply passing the hot potato by converting the vast inflow of dollars, euros and yen emitted by DM central banks into a fantastic flood of RMB. This massive expansion of the domestic monetary system, in turn, enabled the greatest credit bubble in world history.

Stated differently, China’s total credit market debt outstanding did not explode from $1 trillion to $25 trillion in just the last 14 years because the sons and daughters of rice farmers working in export factories went on a savings binge, thereby enabling a healthy expansion of debt-financed investment.

To the contrary, the central banks of the world went on a money printing binge and the comrades in Beijing took the bait. Namely, they chronically and massively scooped up excess foreign exchange from trade and capital inflows and stuffed it into the vaults at the central bank. This was supposed to keep the exchange rate battened down and the growth and export miracle ramping.

In age old fashion this mercantilist gambit seemed to work for a while—indeed, a long while of nearly two decades. But all the time the aging autocrats who ran the system, and who had learned their economics from Mao’s Little Red Book, were  actually swapping the labor of their young people and resources of their land for debt emissions of the profligate West. And in the process they were steadily inflating a fantastic credit bubble that financed the construction of anything that could be imagined by local party cadres and “businessmen” alike—-airports, bridges, highways, high-rises, office towers, train stations, fast rail, shopping malls, new cities, endless factories.

But the massive construction site within China’s borders defied the laws of economics and plain old rationality.  It is literally impossible for an economy to record double-digit GDP growth year-upon-year in which 50% of the gain is due to “fixed asset” investment in public infrastructure and private real estate and industrial capacity. The reason is that no society could sustain the level of consumption forbearance and mass austerity that would be required to fund such massive investment out of honest savings.

Instead, the party overlords got lured into a dangerous economic Ponzi. They sent more and more freshly minted credit—-20-35% more in some years—down the state controlled banking system where it was parceled out to state controlled enterprises, local party rulers and independent entrepreneurs.

These recipients turned it into cement, rebar, fabrications, office towers, coal mines, power plants and port facilities—-without regard for sustainable rates of return. And when returns disappointed or failed to materialize at all—such as in the empty new cities, malls and luxury apartment buildings— more credit was advanced to keep these “investments” solvent. That is, new debt was issued to pay interest on the old.

So parallel to the downward cascade of credit was an equal and opposite upward back haul of fixed asset GDP.  In short, Beijing could hit its national GDP target nearly to the decimal point year after year because its was printing GDP through the machinery of a credit driven command-and-control economy, not presiding over anything that resembles a sustainable capitalist economy.

In a sense, after the disastrous failure of Maoism, the party dictatorship has maintained its lease on life only be synching-up with the global central banking swindle that has been underway for four decades now—but especially since 1994 when Greenspan panicked after that year’s bond market route.

The giant issue facing China, however, is that it is at the end of the money-printing chorus line. It has now absorbed so much excess debt from the West and thereby inflated its credit Ponzi to such an insensible extent, that even its current rulers can see the hand-writing  on the wall.

In a recent speech, in fact, Premier Li let the cat out of the bag, calling China’s massive hoard of foreign exchange for what it is—-a vendor loan to foreign customers who buy but do not sell; who consume but do not produce. Suddenly, what has been ballyhooed for two decades as evidence of the Chinese miracle is officially labeled a “big burden”.

Actually, it has been a burden all along. The comrades have presided over the erection of a Ponzi of such immense and convoluted magnitude that they have no hope of unwinding it without a thunderous “hard landing”

 May 11 – Reuters: “China’s war chest of foreign currency reserves has become a headache as its continued rise could stoke inflation in the long term, Premier Li Keqiang said… pledging to reduce the country’s trade surplus. China’s foreign exchange reserves, the world’s largest, grew by $130 billion in the first quarter, to a record $3.95 trillion… ‘Frankly speaking, foreign exchange reserves have become a big burden for us, because such reserves translate into the base money, which could affect inflation,’ Phoenix New Media Ltd quoted Li as saying… ‘From China’s perspective, macroeconomic controls could face tremendous pressures if the overall trade is imbalanced.’ China will take steps to reduce its trade surpluses with the rest of the world…”

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Slave's picture

SHTF worldwide. NWO rises.

Vampyroteuthis infernalis's picture

The Fed should be proud of it's protege, People's Bank of China. May they rot in hell both of them.

BigJim's picture

I fucking love David Stockman. The man must have decided to devote his entire life to lifting government carpets and letting the sunlight illuminate the skulking things writhing beneath.

Keep away from hot tubs, David!

NoWayJose's picture

China actually got the surplus by being one of the only bastions of capitalism left on the planet. Imagine a country where an entrepreneur can actually get a loan, can open a factory, can improve a product or figure out how to produce it cheaper, and can have access to a worldwide distribution network. That's not Keynes.

asiafinancenews's picture

Forex Accumulation is the product of an unbalanced economy which requires currency manipulation to remnain competitive.

ThomasMalthus's picture

NoWayJose's idea of capitalism is crony capitalism.  Because, you know, bribes are a market that should be free too.


Anyway, since China won't be getting good return on their dollars, which country(ies) do we think they'll be invading?  My bet is on Taiwan.  (Guaranteed to be portrayed as nationalism to quell the dissent from the sinking economy.)  WTO is going down, hard!

NidStyles's picture

Not sure I would be listening to a guy calling himself Malthus. 

vato poco's picture

Hey now, don't be hatin on Malthus. That silly dead fucker has only been wrong for 200 or so consecutive years now.....the way economists look at it, a) that hardly constitutes a trend or anything and b) he's gotta be due to be right soon!!

BigJim's picture

I'm betting you're a 'early is wrong' kinda guy.

A Nanny Moose's picture

Best time to fly is after a plane crash.

SAT 800's picture

LOL. You're the very definition of clueless. Forex accumulation is the result of manufacture and foreign sales. Manufactured products sell for more than the raw materials costs; this is called "Value Added"; it's brutally simple. You do show signs of having absorbed some mass media apologetics, tho.

asiafinancenews's picture

Wow.......don't spend China's payment all in one place! :)

Export-dependency is a condition which qualifies as an "unbalanced" economy.  Read, think, and then understand.

new game's picture

pegged to ? dolla/ MANIPULATED. could have been a one sentence read.

ManiPULATION, of economy via pegging yuan to dallor...

BigJim's picture

 Forex accumulation is the result of manufacture and foreign sales. Manufactured products sell for more than the raw materials costs

You're both right. The Chinese have out-produced the West and have consequently been able to out-sell them. But the Chicom's capital controls have distorted what would usually happen in such cases: the workers and entrepreneurs would have held the foreign currency earnings themselves; to spend them, they would either have had to import stuff from overseas, or sell them to buy RNB (thus pushing up the price of RNB, making Chinese exports less competitive) to buy locally.

Something that gets ignored in the whole 'Chinese labour is slave labour' debate is that Chinese entrepreneurs started off from a much lower cost base, in that it was not only wages but land rent and taxes that were much, much lower than competition in the welfare-warfare debt-addled West.

SAT 800's picture

Imagine Federal Politicians who are so cynical and so greedy they are willing to sell that access to a worldwide distribution network; knowing that it will result in the impoverishment of their own country. Well; really, they don't have any country; they're country is the dollar. Remember this well; when the opinion manufacturing machinery starts grinding on the idea of Hillary for President. Bill Clinton wasn't an ignorant Negroe Marxist; he knew exactly what he was doing.

fattail's picture

Especially when you can rape and pillage the region's resources and environment with a little graft and influence.  Also helps if the labor supply is so large that wages and conditions are so low and pitiful it is almost slavery.


I Write Code's picture

I have no idea what you just said.  They saved it?  They spent it directly on infrastructure?  They passed it down as reserves in a fractional banking system?  And now, something has changed?  And this was good, or bad, or what?

Maybe you're trying to say something like they didn't just print money, they earned it first, and this is, um, good, or bad, or obsolete, or what?  Maybe now they want to follow our example and just print, but they're afraid of that, or if they just print what do they do with these trillions in greenbacks?  Is that a *problem*, really?

Frilton Miedman's picture

He said China is going to have a hard landing...with lots of inflation, because Keynesian spending has caused them to be producers rather than consumers, yeah, that's it.

hobopants's picture

Those reserves have us by the balls while they vaccuum up gold and form bilateral trade agreements with Russia and the rest of the world.

They have the infastructure to produce whatever they want now and the population to consume it, the only thing lacking is energy and natural resources which they can get from Russia and elsewhere through trade.

Their biggest issue is how do they get rid of the Dollar without starting up a War or unsettling global trade, and they seem to have hit upon the right course of action, do it slowly. 

OC Sure's picture

It was driving me crazy too attempting to understand exactly what so many articles are trying to convey (not just Stockman's) and found that not everyone is using the same terms in the same manner and that above all the confusion of the terms works to tyranny's advantage. Exasperated, I started writing the terms myself and identifying precisely what they mean. Here is a sample of the origin of Money and Counterfeit:

"...What modern economics calls the banks' multiplier effect or leverage is not the production of money but instead the creation of counterfeit. That is it is not the representation of the measure of work performed. Instead it is the impersonation of work performed; it took no labor to produce the measure of the multiplier and leverage, all it took was a pen stroke or an enter key. It represents no productive work and is therefore not money but instead it is counterfeit. Money is the measure of work a person does to produce their product which satisfies the demands of other producers. Counterfeit is the impersonation of productive work done when actually none has been performed. The purpose of counterfeit then is to represent the illusion of trading something for something when in fact it is the trading of nothing for something. Whomever trades nothing for something is a thief..."   


I hope you enjoy the full context from which this passage was taken. It is a quick read. Have a peek and tell 2 friends to tell 2 friends. Tyranny won't be stifled successfully if we continue to accept their terms. The purpose of their terms are to make the mind numb so the body will obediently succumb. 

DavidC's picture

Meanwhile the overnight markets slowly bleed higher...


deflator's picture

 Are they still distributing free televisions in China to increase internal consumption? Nothing like the warm glow of an idiot box to make people need, want and desire.

BigJim's picture

Wife Yin, watching 'Dallas': Oi! Husband Yang! Why not we got Gucci loafer???

Husband Yang, startled midst blobbing-up: Shutup, Wife Yin! I go buy $4 Genuine 'Gucchi' loafer at market tomorrow!! For all family!!

Oldwood's picture

Do they keep their IOUs in a lock box like our SSI payments? I'm sure we are good for it.

magnetosphere's picture

wtf.  china's explosive growth is due almost entirely to massive exploitation of heretofore inaccessable coal reserves far from the eastern coast.

Oldwood's picture

I can't help but wonder, when the Chinese finally stop taking our credit and demand we make good for our debt, if our kind and considerate government will simply send them the keys to my house? Seriously, who's debt is it anyway. Our government is a corporate entity with no actual ownership of assets that is not OUR property. Maybe they deed over the grazing rights to vast federal lands in Arizona to the Chinese?


We have no idea how bad this will fuck us over. Its not even like we have a nationalist president or state department that would give a shit. Anything for the brave new world order.

ThomasMalthus's picture

However... we promised to pay back the Chinese in USD, which by the way we have an unlimited supply.  They'll get their money back, but it will be worth much less than when we borrowed it from them.  In the end, they gave us a bunch labor and natural resources FOR FREE.  LOLOLROFL!

Fuckers?  If you mean we fucked over China, then yeah we are.

SAT 800's picture

I'm glad you enjoy paying the interest on the Treasuries the Chinese own out of your income taxes. The Commisars and the Peoples Army appreciate your contribution.

Telemakhos's picture

Is that interest denominated in dollars?

Think it through—it matters in this context.

post turtle saver's picture

what's the fed funds rate again... this term 'ZIRP' keeps getting thrown around I've noticed

Spitzer's picture

True but it's gone on for so long that the US is a hollowed out wasteland. This is how bad it is and they still have the reserve currency. It will look like Mexico in the 80's when the dollar falls

Oldwood's picture

So you think the Chinese are just going to accept us wiping out their saving values laying down? I'm not sure of their methodology but I think they will seek payment in some fashion commensurate to their perception of value. Our government's willingness to print is based on their desire to steal the wealth of our nation, not just from our pockets but the very ground on which we stand. Fuck over China, I think not. Fuck over us.

ThomasMalthus's picture

I totally agree.  But I don't believe their value extraction will be financial.  In order to rebalance trade they HAVE to take a hit on their foreign reserves as their currency increases in value.

Instead, I believe their value extraction will be militiary.  Disputed territory with Japan... Vietnam... possibly taking Taiwan which they say is theirs anyway.  That's the alternative.  The WTO business of peace through commerce is falling flat on its face.  Setting up unbalanced trade was great for the elite that set this system up.  Now the peons will pay the price through war.  The upcoming decades will not be pretty.

ebworthen's picture

"...PhD jabberwocky with a Wall Street accent."

Love Stockman's writing. 

All China has to do is sell its U.S. Treasuries, make the Yuan the World Currency, and start a war.

thestarl's picture

Even before my ZH days i understood perfectly well that China dumping their USD treasuries would be considered an act of war

BigJim's picture

Apparently, the can't just 'dump' them; Rickards discusses this in 'Currency Wars'. I forget the details, but the US Treasury can stop wholesale 'dumping' of its debt via its control of some banking system choke-point.

Nonetheless, China could announce it'll be selling them off as quickly as the US Treasury will allow it to, which would have an interesting effect on the market's perception of the liquidity and store-of-value of this 'most liquid of investments' if the Treasury exercised its ability to stop/slow the sale.

I'm sure Mr Belgium, sorry, Mr Yellen would pick them up; both the Chinese and the US might do it all under the counter so the market doesn't get too roiled.

post turtle saver's picture

more like an act of suicide, which is why they won't do it

alfred b.'s picture


    The fed is China's ragdoll...they keep their US treasuries attractive while capping the price of hard money!   China ain't complaining, for now!



pashley1411's picture

At its base, a country's base is the productivity of its capital and citizenry.  There is a godawful monetary whiplash coming, but China will continue to be a more productive nation afterwords.   Just under different ownership. 


AdvancingTime's picture

 Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need. Like a plane on autopilot China continued in the direction it had been on.

Now China finds itself in a credit trap. For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful. More in the article below.


SAT 800's picture

China is not in a credit trap; this is nonsense. there will be a typical "bust" as a part of the "boom-bust" cycle caused by human emotional wiring; but they're not broke; we are.

Prairie Dog's picture

Mr Angry of Greenwich, Connecticut, is disappointed with the world. Again. Ho hum.


Againstthelie's picture

I am not sure, if the article is correct.

The Chinese foreign exchange reserves are the result of REAL productivity.

A chinese company produces goods and the revenue of these goods is higher than the costs. This creates the money inflow into China.


For how many years have we been hearing of the coming Chinese collapse? Could it be it's based on false models or assumptions?

The first mistake is that everything is compared to the USA. So also a crash in China must be like in the USA or the western ponzi world.

But the USA is a debtor nation, it consumes more than it produces. So any growth in GDP is not based on a country that is becoming richer, but only because of increasing DEBT in boom cycles.

Contrary to Chinas GDP, which also has credit grwoth, but the Chinese produce more than they consume and so the credit growth is based on REAL growth.


Therefore I'd argue, that as long as China has such huge trade surpluses, any implosion would be limited, because the credit IS based on a real growing economy.

Let's assume the housing bubble in China was that huge as everyone believes. Since the rising prices go into the GDP, then please explain to me, if the chinese economy was a bubble, why does it have such a huge trade surplus?

If it would be a bubble, let's say because of housing, then like in the US the GDP numbers would be blown up, but the trade deficit would show the real quality of the economy. And that would be a trade deficit.

But China has a trade surplus. This tells me, that the bubble cannot be that big, that it could threaten the economy, like the US bubble machine threatens the US economy.


There will be  recessions, severe recessions, but as long as the Chinese produce more than they consume, their economic base is intact and will recover. IMO very different to bancrupt bubble economies.

SAT 800's picture

You've got ahold of the right corner of the carpet. The false world view is that "Mercantilism" is "bad"; or out dated, or something; no good in general. It isn't. It works just fine. the British Empire was based on manufacturing and export. The American Success story was based on a two legged success story, the exploitation of a very rich virgin continent, and manufacture and export. Any attempt to accept any part of the modern economic thesis; as Stockman does, results in terrible cognitive dissonance. When the light goes on in your head as a result of studying real history; all of a sudden everything is very simple and easy to understand. Several statements that Stockman makes are nonsensical on their face. But the underlying situation is this; our most important product is inflation; of course the chinese had to keep up with the inflow of dollars by printing their currency; this is obvious. this is what is meant by the export of inflation; it's not optional it's obligatory. But they aren't operating in any kind of false economy; we are. The FRN's they have access to buy real things; iron ore, coal, oil, electronics fabrication lines, copper; and of course Gold. The FRN's we've indebted outselves with are destined to buy misery and disaster. Being too rich is not such a bad problem. Congress and Bill Clinton sold us, all of us, the American citizens to China. By granting most favored nation trading status; at the behest of and on the payroll of the multinational Corps. of course. Manufacture and export is the magic in the modern history books; the high standard of living magic; failure to manufacture and export and live like a king on your credit card always ends the same way. Always. there are no exceptions. I suppose Stockman, from a Freudian point of view, has some sort of terrible drive to carefully ignore these rather obvious facts. Economics is actually very simple.

SAT 800's picture

It occurs to me that maybe I didn't make this simple enough. the situation was this; the American Citizen was taking home in his paycheck, entirely too large a cut of the Capitalists profits. So they hired Bill and Hillary to fix it; and a few Senators, of course. And they did. They fixed it. Okay? You understand now? Good.

Spitzer's picture

It is.

But how do you explain the one way flow of goods and the absents of any business or credit cycle in the last 30 years ?

How come the market cannot correct these hugely unbalanced forces ?

BigJim's picture

 But the USA is a debtor nation, it consumes more than it produces. So any growth in GDP is not based on a country that is becoming richer, but only because of increasing DEBT in boom cycles.

Contrary to Chinas GDP, which also has credit grwoth, but the Chinese produce more than they consume and so the credit growth is based on REAL growth.

The US was a creditor nation back in 1929. How did that turn out?

The false world view is that "Mercantilism" is "bad"; or out dated, or something; no good in general. It isn't. It works just fine.

It works just 'fine' when it's voluntary. To understand why, reduce the mercantalist 'system' down to its smallest unit - a person. The analogy of a mercantalist person would be someone who produces more than s/he consumes, and either hoards the excess or lends it out at interest. If the hoarded savings are in the form of something perishable, then wealth is being destroyed; if they're in something like gold (in an unmanipulated PM market) then it's fine, even if the gold is just sitting under a mattress, it benefits other gold holders by pushing up the price of gold very slightly by reducing the supply side of the supply/demand equation. If the savings are lent out for unproductive consumption, then the chances are considerable that the full value of the principle is at risk (ie, wealth is being destroyed); if the savings are lent for productive enterprise, then the principle will be returned with interest, society benefits from increased production, and everyone is better off.

So this is 'voluntary' mercantalism - a person decides to produce more than they consume. However, there is involuntary mercantalism, too. In our analogy, involuntary mercantalism is exemplified by slavery. The slave produces more than s/he consumes, with the benefit of the excess going to his 'owners'... who may then deploy the excess to consume or invest as they wish. Chinese mercantalism is more like this, and operates not via old-style chattel slaver, or new-style slavery via monetary feudalism and high taxation as in the West, but via capital controls and currency laws. Much of the excess capital that arises from China consuming less than it produces is accruing to the government, which is both hoarding in the form of perishables (USTs) and unperishables (gold), as well as being 'used' in a mixture of productive and unproductive enterprises.

So yes, mercantalism 'works', for the same reason slavery 'works' - for the elites who are extracting value parasitically from those who are producing it.

Againstthelie's picture

The US was a creditor nation back in 1929. How did that turn out?

Excellent reply. Destroyed my thesis in one sentence.

I checked it with FRED:

A trade surplus does not prevent an even bigger credit bubble. My thesis was wrong.