Why The Chinese Rate Cut Will Do Nothing To Slow China's Economic Decline

Tyler Durden's picture

Submitted by Bryce Coward via Gavekal Capital blog,

Today the Peoples Bank of China cut the benchmark interest rate by .25% and lowered banks’ reserve requirements by .5%. The measure is supposed to spur growth and make life a little easier on debt-ridden Chinese companies. In the immediate term it may give a slight boost to the economy, but there is no chance this measure, or others like it, will keep the Chinese economy from slowing much further in the years ahead. Let us explain...

The continued and dramatic slowing of the Chinese economy in the years ahead is baked in the cake. For the last decade Chinese growth has been fueled by investment in infrastructure (AKA fixed capital formation).

 

In an effort to sustain a high level of growth massive and unprecedented investment in fixed capital was carried out and fixed investment has now become close to 50% of the Chinese economy.

 

On the flip side, consumption as a percent of GDP has shrunk from about 46% of GDP to only 38% of GDP. Most emerging market countries run with fixed investment of around 30-35% of GDP and with consumption accounting for about 40-50% of GDP – exactly the opposite dynamic of the Chinese economy.  China has run into a ceiling in terms of the percent of the economy accounted for by fixed investment and now fixed investment must shrink to levels more appropriate for China’s stage of economic development.

 

This necessarily implies a slowing of the Chinese economy from what the government says is near 7% to something closer to 2-4%, and that is in the optimistic scenario in which consumption growth picks up the pace to mitigate the slowdown in investment.

This is why cuts in rates mean practically nothing for China’s long-term economic prospects. In the short-term rate cuts may postpone corporate bankruptcies by allowing companies to refinance debt at lower rates. Rate cuts may also make housing more affordable, on the margin. But these are cyclical boosts that act as tailwinds to China’s economic train.

EM Index Quarterly_Page_1

 

No amount of wind, save a hurricane, is going to keep the train from slowing.

As a reminder, it has not been working...

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yogibear's picture

Yep, in the US, the youth are loaded with debt.

Global wages are arbitraged.

More US companies moved operations overseas/outside the US.

US is manufacturing more debt, not products.

A debt saturation situation situation

 

Thought Processor's picture

 

I think things are just starting to get rolling in China.

 

And not to the upside.  

 

They have exhausted the largest industrial revolution in history, where both speculation and underground dealings ran completely off the charts.  Now reality is about to strike which should be interesting because neither the underground sources or the above ground sources (re: banks) have an effective or efficient clearing mechanism for bad debt.  It's all run by edict and to say the whole provess is corrupt would be the understatement of the year.  

My guess is that the skeletons will slowely be rising to the surface for years to come over there.  Should be fun watching their Gov. try to contain everything though.

 

Do not panic.

 

All is well.

 

 

Ham-bone's picture

Why the story of China shifting from a supplier to a nation of consumers is a silly fiction...

  • China's 15-64yr/old population will fall by 30 million from 2015-->2030...while the population of 65+yr/olds will rise by 100 million entirely dependent on their adult children to fund their "retirement" years. 
  • Compare that to 2000-->2015 increase of 150 million 15-64yr/old Chinese and "only" 40 million 65+yr/olds

 And it gets much worse from there.

http://econimica.blogspot.com/2015/10/economicsart-of-deception-vs_20.html

http://seekingalpha.com/article/3526426-the-story-of-china-is-the-story-of-japan-just-10x-bigger

Rainman's picture

Professor Larry Lang made the call 4 years ago :

     " Every province in China is a Greece "

                    http://investmentwatchblog.com/professor-larry-lang-every-province-in-china-is-greece/

silverer's picture

But it looks good on paper.  That's even more important than having it work.  Ask the Fed, they'll tell you.

EHM's picture

Wait a minute! Are you saying that rate cuts are ineffective?

Not Goldman Sachs's picture

But can't they just make rates negative and get paid for their debt?

RagnarDanneskjold's picture
The Chinese Recession Ready to Move Into Services as the impact of the industrial slowdown starts to hit other parts of the economy. It looks like a typical slowdown. Meanwhile,  Winter Has Arrived Early for Banks as Assets Fall, Bad Debts Rise and that is in the fastest growing province in China. Imagine how it's going to look in the provinces that are probably already in recession.
yogibear's picture

Plenty of loans to go bad after maxing out on debt.

RighteousDude's picture

The Chinese are producers,  not consumers.

They are supply not demand.

 

And right now everybody needs DEMAND.

Grandad Grumps's picture

For China, a value adding producing economy to grow, they need an ever increasing number of consumers and ever increasing inflation to cover the fiat debt repayments.

Do we have that? I am thinking that consumers are pretty well tapped out, thanks to the banks, their central planning and wealth redistribution to the ultra wealthy.

scatha's picture

China, a nationalist state, no longer a communist state, is continuing to follow western script of suppression working class and just emerging middle class via socially devastated monetary policy that leads to ZIRP with all the consequences we experience now in the West of which most important is destruction of the value of labor and people's savings while promoting excessive commercial and consumer debt, all against Confucian tradition of restrain, stoicism and long range thinking and planing that still permeates the Chinese society.

China's biggest problem is China herself, facing utter collapse of the world demand due to appalling raise of the inequality and crashing debt of the ordinary people all over the world.

China must look inside for solutions or, as US did, ignore internal problems and fate of Chinese people and turn into global imperial power seeking economic domination elsewhere in the world in a futile search for internal stability. The choice China was being confronted already many times before in her history.

More interesting take on China and collapse of global trade I found at:

 

https://contrarianopinion.wordpress.com/economy-update/

"REVERSE CHINA SYNDROME: A VIEW FROM ABOVE."