China Warns No "V-Shaped" Recovery Is Coming; Says "There Will Be No Strong Economic Stimulus"
One week ago, many were shocked when an in an exclusive interview with China's official mouthpiece, the People’s Daily, an "authoritative insider" offered his interpretation of the details of China’s supply side structural reform.
This anonymous person who was important enough to be on the cover page of Xinhua and thus to set the expectations of over 1 billion Chinese citizens accordingly, said that China's proposed "reform was decided on after careful deliberation about China’s economic situation" adding that "new economic risks are emerging from falling economic growth, industrial commodity price, corporate profit and the growth rate of fiscal revenue. In addition, most of these problems are structural rather than cyclical."
His punchline: "against such a backdrop, China’s economy is unlikely to achieve a V-shape rebound, but instead an L-shape growth."
But his most dire warning was one which would make an already unhinged Paul Krugman even more unhinged: "To deal with the medium and long-term economic malaise, the traditional Keynesianism methodology does not work. A structural reform is thus needed to address the root cause."
Needless to say we liked said "authoritative insider" off the bat.
However, maybe because not enough people caught the dire warning the first time, moments ago Bloomberg reported that Han Jun, the deputy director of China’s office of the central leading group for financial and economic afairs, spoke at an event at the Chinese consulate in New York and practically reiterated the anonymous source's warning practically verbatim. To wit:
"There won’t be a strong economic stimulus and people shouldn’t expect a V-shape recovery; instead long period of L-shape growth path is likely" said Han, who participated in the drafting of China’s latest five year plan.
One week ago we were confused just what "L-shaped growth" looks like. Seven days later we are just as confused. After all, there is, well, no growth in an L-shape.
Confusion aside, whether Han was the "authoritative insider" referenced one week ago is irrelevant, but what is notable is that China is making it very clear that the old way of growing the economy to higher artificial GDP rates is no longer be welcome. It remains to be seen if he is only jawboning, although every passing day in which China does not engage in some massive stimulus is probably a confirmation that China may be serious.
As if that news was not bad enough, Han also added that China has not manipulated yuan to gain unfair competitive advantage, begging the question just why it has manipulated the yuan in that case.
He concluded with the usual platitudes uttered by any country undergoing currency war, namely that the "Yuan faces pressure of depreciation, but this is temporary and longer term the currency can depreciate or appreciate as two-way volatility becomes new normal." Finally he noted that "China is not seeking devaluations yuan to stimulate exports but wants to promote basic stability of yuan and opposes currency war."
Considering the epic damage the recent PBOC actions have done, one can be excused to be a little skeptical.
Finally, if indeed China is now holding back on "massive stimulus", this will have dramatic implications for social stability as the original Xinhua interview hinted:
Q. Some people are concerned about the social impact brought by the reform. Can Chinese society sustain it?
A: During reform, especially when reducing excessive production capacity and shutting down “zombie companies,” it is likely that there could be an impact on society.
Turbulence cannot be entirely avoided, but it is worthwhile turbulence. If properly handled, the reforms will not cause long-term turmoil in society.
Which brings us back to an article we wrote in November laying out "The Biggest, And Most Underreported, Risk Facing China", which as we then noted (and which subsequently both the NYT and WSJ reported on) was social instability as a result of a dramatic - and very adverse - change in labor and employment conditions, one which judging by the soaring number of labor strikes, suggests that the "turbulence" noted above is anything but being "handled properly."
Keep a close eye on stories about Chinese worker strikes, revolts and uprisings because aside from a debt and stock market bubble, currency devaluation and capital controls, the Politburo may be very busy trying to avoid a working class insurrection in the coming months...
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So is this a double down triple head fake?
Under Pressure. https://www.youtube.com/watch?v=aUW_8cWG7YA&list=PLEB62A95CB8D0705C&inde...
1.4 billion soon-to-be-angry Chinese might have something to say about 'no strong economic stimulus'.
RIght because stimuluses work so well!
No "V" shaped Recovery? More like a "L" shaped Recovery??? naw...
Instead, more like a "F'd" shaped Recovery...
Oh no! Not a V shaped recovery but an L!!??? How about a W or a quadruple W? Maybe an inverted M. Anything but an L! Personally I'm rooting for a P shaped recovery - what ever that would look like.
WAR
ahhh, gosh, is anything real? sure -yup, went outside to get some wood and at -7 and it was real cold...
windchill - 20...
^^^ This is why I remain in Southern California.
spare room for about 4 months?
Are you a hot, 22 year old, swedish woman of experience?
Ho Li Fuk !! Wei No Vei !!
Sum Ting Wong! Bang Ding Ow!
Clearly, they're going to run it up the middle. :-)
sleeping giant is gonna wake up and be cranky.
Isn't it far better to close zombie companies rather than bail them out with billions and billions as they have done in the US to no avail except for making the fat wallets of the 0.000001% even fatter?
You neglected to mention Democrat bundlers and various other FoO.
Really?!!!
Glad that I was not the only one who has no frickin idea what an 'L shaped growth' chart would look like...
It goes to the bottom and stays there forever.
There you have it. China is going to "L".
I see what ya' did there. <Golf Clap>
Perhaps Mr. Yellen should ask the Communist Chinese for advice on markets and capitalism.
Hey China, just blow up a shit load of empty buildings. Then rebuild them. That should get you back to robust growth.
Hey, Obama, just blow up a shit load of occupied buildings in a 'third-world' country. Then build 'green zones' in them. That should get you back to robust growth. :-)
Hey, Obama, just blow up a shit load of bureaucrat filled U.S. government buildings....
Where are the 'New Silk Road' project/s to absorb the recently disenfranchised 'working class'...? High-speed trains and infrastructure from China to Europe should absorb a few tonnes of Cu, Al, Mg, Mo, Iron Ore and workers, no...?
This means that China’s overall debt-to-GDP ratio is continuing its steady upward march (see chart). Debt was about 160% of annual output in 2007. Now, China’s debt ratio stands at more than 240%, or 161 trillion yuan ($25 trillion), according to calculations by The Economist. It has risen by nearly 50 percentage points over the past four years alone, with slowing growth only serving to magnify indebtedness
http://www.economist.com/news/finance-and-economics/21676837-credit-growth-still-outstripping-economic-growth-deleveraging-delayed
---------------------
US national debt to GDP is something like 1-1.
https://research.stlouisfed.org/fred2/series/GFDEGDQ188S
Decades ago we heard the same song about how great Japan was, lol.
China is finished and is going down hill from here.
You forgot the unfunded liabilities at over $200 trillion.
The US would be insolvent without the FED's printing press.
+++ A bolt of sanity.
Thank you BoP ---
I certainly agree with you as to the eventual danger of unfunded liabilities, yet I think it is important to point out two factors:
1) Other nations also have unfunded liabilities but the problem does not seem to garner as much publicity.
2) Unfunded liabilities represent an eventual future call on available resources, not an immediate one such as the actual gross national debt can be.
People can't take their unfunded liabilities to the Treasury and demand payment today.
It should also be remembered that local and state debts need to be added to the current US number.
Some truth from the ministry of lies ?
The people will be happy...they will have fresher air to breathe...
They have the gold so they can make the rules
perhaps, a tad too much debt?
More from Startfor via Mauldin Economics on the joke that is China:
China’s Strategy
Jan 04, 2016
The sharp decline in Chinese stock markets on Monday is a reminder of two things. The first is the continued fragility of the Chinese market. The second is that any economic dysfunction has political implications, both in Chinese domestic and foreign policy. This, in turn, will affect Chinese economic performance. It is essential, therefore, to understand Chinese national strategy.
The People’s Republic of China (PRC) has been portrayed as an increasingly aggressive country prepared to challenge the United States. At the same time, aside from relatively minor forays into the South and East China Seas, China has avoided significant involvement in the troubles roiling in the rest of Eurasia. There is a gap between what is generally expected of China and what China actually does. To understand what China’s actual national strategy is, it is helpful to follow the logic inherent in the following five maps.
Let’s begin by defining what we mean by China. First, there is the China we see on maps. But there is also the China inhabited by the Han Chinese, the main Chinese ethnic group. Maps of the Chinese state and the ethnic group would look very different.
Han China is surrounded within China by regions populated by what are essentially other nations. The four most significant are Tibet in the southwest, Xinjiang in the northwest, Inner Mongolia in the north, and Manchuria in the northeast. The first three are recognized by Beijing as autonomous regions while Manchuria is a larger region made up of three northeastern provinces. Obviously, there are Mongolians who live in Han China and Han Chinese who live in Inner Mongolia. No region is homogenous, but these four regions, with the limited exception of Manchuria, are not dominated by ethnic Han Chinese. About half the territory of what we consider China actually consists of Han Chinese people.
These four regions are a buffer around China, providing strategic depth to repel invaders. All four, at one time or another, resisted Chinese domination, as Tibet and Xinjiang still do today. Xinjiang is predominantly Muslim, and an insurgency and terrorist movement is particularly active there. Tibet is less active but no less opposed to Chinese domination. Inner Mongolia and Manchuria are generally content at the moment. The mood in these regions varies, but China must always be concerned to maintain control.
Not incidentally, a very similar geography emerges when we look at rainfall patterns. Roughly 15 inches of annual rainfall is needed to maintain an agricultural economy. This line, called the 15-inch Isohyet, is shown in the next map along with areas of population density in the People’s Republic of China.
The area east of the 15-inch Isohyet is Han China plus parts of Manchuria. The area to the west and north are the buffers along with some Han Chinese regions that are lightly populated. So one of the reasons Han China can dominate the buffer states is its relative population advantage. But this also means that the population of China, totaling 1.4 billion people, is crowded into a much smaller area than an ordinary map would show and much farther from most neighbors of the PRC. But for now, the rainfall line roughly defines the limits of what we think of as the Chinese.
The next map adds to this picture. It is a map of annual per capita income by province. It shows an underlying division in China east of the 15-inch Isohyet. First, the economic difference between Han China and the rest of the PRC is striking. Per capita income in the western buffers is between 30 and 50 percent lower than the median income in the rest of China. And the area in China that is above the median—some more than 100 percent above the median—is a thin strip of provinces along the coast. The interior of Han China is not as bad off as the western buffers, but is still well below conditions along the coast. Economically, only the coast is above the median. Every other area is below it. And this defines a division in Han China itself.
However, per capita income is not a measure of economic well-being since it doesn’t tell us anything about the distribution of wealth. A better measure is household income. According to World Bank data, over 650 million Chinese citizens live in households earning less than $4 a day. Just under half of those live in households earning less than $3.10 a day—or about $1,000 a year.
This alone doesn't capture the true reality. Obviously, the overwhelming majority of these people live outside the coastal region since the coastal region is much wealthier. Put another way, most Chinese wealth is concentrated 200 miles from the coast. The next 500–1,000 miles west is a land of Han Chinese living in Third World poverty. The China that most Westerners think about is the thin strip along the coast. The fact is that China is an overwhelmingly poor country with a thin veneer of prosperity.
We can already see some strategic realities emerging, but before we turn to that, we need to consider the next map—a terrain map of the areas surrounding China.
China’s southern border consists of the Himalayas in the west and hilly jungle country in the east. It is impossible to conduct major military operations in the Himalayas, so talk of a Chinese-Indian conflict is only possible for those who have never tried to supply an army. Similarly, as the British and Americas have discovered, conducting military operations in the hilly jungles of southeast Asia is a nightmare. China can’t invade anyone through the south over land, nor can it be invaded. Southern China is protected by a true Great Wall.
To the north, the PRC is bordered by Siberia. In the far east of Siberia, it is possible to conduct war, but no country has ever tried or conceived of waging an extended war, including invasion into Siberia, nor has any country attempted to mount an invasion from Siberia. Therefore, except for the Pacific Coast, China is secure and contained.
There is occasional talk about Chinese military operations in Central Asia. First, this would have to take place through the hostile territory of Tibet or Xinjiang. The major forces and supplies would have to be transported over 1,000 miles from the industrial base in Han China to the Chinese border. The supply lines would pass through desert and mountains. An invasion of Astana in Kazakhstan would require travelling a distance of at least 700 miles through mountains and near desert grasslands. Fighting in these ranges is as unlikely as invading over the Himalayas.
In effect, China is an island in Eurasia. It can move money around and sometimes technology, but not large modern armies. Therefore, China is not a threat to its neighbors, nor are they a threat to China. China’s primary strategic interest is maintaining the territorial integrity of China from internal threats. If it lost control of Tibet or Xinjiang, the PRC’s borders would move far east, the buffer for Han China would disappear, and then China would face a strategic crisis. Therefore, its goal is to prevent that crisis by suppressing any independence movement in Tibet or Xinjiang.
An equally urgent task is to assure that social conflict does not arise between the coastal region and the Han interior. The loss of foreign export opportunities has placed pressure on the coast. Beijing’s interest in maintaining stability in the interior requires transfers of money from the coast. However, the coast’s interests are focused on the United States, Europe, and the rest of Asia since these are the coast's trading partners and the interior is incapable of purchasing the coast’s products. No stimulus imaginable can raise the interior’s income levels to the point that this area could become a market for the coast given the poverty they live in currently. This would be a multi-generational project.
This is not a new problem for China. Prior to Britain and the Opium Wars in the 19th century, China was enclosed, isolated, and relatively united. When the British opened China, massive inequality between the coast and the interior arose with the coastal region being more integrated into the global economy than into China’s economy. This led to regionalism and warlords, as each region had unique interests. Mao went into the interior on the Long March, raised a peasant army, destroyed the regional leadership, and enclosed China. China was poor but united. With his death, China went into the next phase of its cycle—reopening itself and betting that this time the coastal-interior split wouldn’t arise.
The split has arisen, but the political consequences have not yet played themselves out, and the strategy of the Communist Party is to forestall this by a combination of repressing any sign of opposition and a massive purge among the economic leadership. This is designed to both hold the coastal wealthy and the interior poor in check. Whether this will work depends on whether the People’s Liberation Army, essentially a domestic security force, can withstand the forces tugging it in various directions. Notably, a purge and reorganization has just begun in the PLA.
The core strategy of China is internal. It has only one external strategic interest—the seas to the east.
China has vital maritime interests built around global trade. The problem is the sea lanes are not under its control, but rather under American control. In addition, China has a geographic problem. Its coastal seas are the South China Sea, south of Taiwan, and the East China Sea, to its north. Both seas are surrounded by archipelagos of island states ranging from Japan to Singapore with narrow passages between them. These passages could be closed at will by the US Navy. The US could, if it chose, blockade China. In national strategy, the question of intent is secondary to the question of capability. Since the US is capable of this, China is looking for a counter.
One counter would be to establish naval bases elsewhere in Asia. However, isolated by a US blockade from these bases, this would be of little use besides shaping regional psychology. Ultimately, the Chinese must create a force that would make it impossible to block access to the Indian and Pacific Oceans. The Chinese are aiming to build a navy that could match the US; however, there are two obstacles to this. First, building warships and support vessels and facilities is fiendishly expensive, and China has put an urgent priority on domestic issues in the interior. Second, building ships is not the same as building a navy. Ships must be forged into fleets, and this requires commanders and staffs experienced in very complex warfare. China has little naval tradition, and building those staffs without a tradition to draw on is not something that would take a generation. Admirals who know how to fight carrier wars are as essential as aircraft carriers.
China’s stop-gap measure is its large number of anti-ship missiles. These missiles are designed to push the United States back from crucial choke points in the seas surrounding China. The problem with these missiles is that the US can destroy them. The US can’t close the choke points while the missiles are there, but the US has the capability to map China’s anti-ship network and attack it before moving into the choke points. China then must control at least some of these strategic passages from air, sea, and land on the islands of the archipelago. And the key island, Taiwan, is beyond China’s ability to seize.
The Chinese currently are unable to break through the cordon the US can place around the exits. China is, therefore, buying time by trying to appear more capable than it is. Beijing is doing this by carrying out strategically insignificant maneuvers in the East and South China Seas, which should be considered less engagement than posturing. China will maintain this posture until it has the time and resources to close the gap. Under the best of circumstances, this will take at least a generation, and China is not operating under the best of circumstances.
China, therefore, has three strategic imperatives, two of them internal and one unattainable in any meaningful time frame. First, it must maintain control over Xinjiang and Tibet. Second, it must preserve the regime and prevent regionalism through repressive actions and purges. Third, it must find a solution to its enclosure in the East and South China Seas. In the meantime, it must assert a naval capability in the region without triggering an American response that the Chinese are not ready to deal with.
The Chinese geopolitical reality is that it is an isolated country that is also deeply divided internally. Its strategic priority, therefore, is internal stability. Isolation amidst internal disorder has been China’s worst case scenario. The government of President Jinping Xi is working aggressively to avert this instability, and this issue defines everything else China does. The historical precedent is that China will regionalize and become internally unstable. Therefore, Xi is trying to avert historical precedent.
George Friedman
George Friedman
Editor, This Week in Geopolitics
Mauldin Economics
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Their analysis, while well researched and interesting, is completely stuck in time. The next war will be a proxy and cyber war. US warfare is a huge integrated leviathan. It relies on satellite communication, real time intelligence, gathering of massive data that needs to be transmitted, and in general warships are only the pointy end of the spear. What lies beneath is what will be f-d in a sw Asia war.
While the US has spent decades building their networks of sleeper cells in the middle east, sw Asia is completely different and favors China in the ability to wage proxy wars in the region. Cyber war is the next shoe to drop, which the US may seem well prepared for, but they are not.
That's a good read - lots of information I hadn't been exposed to, nor thougt about in the past.
Does the Chinese language even have the characters 'V' and 'L'?
'Confucius' contains neither a 'V' nor an 'L'. :-)
The Chinese language does not have an alphabet but idiograms which represent syllables. Therefore the characters "v" and "l" do not exist.
The "L" in the "L-shaped growth" is formed by the y-axis and zero growth on the x-axis. Hence you are right: L-shaped growth is just another term for zero growth.
If the vertical part of the L-shape traces a non-vertical line down, the horizontal portion of the L will be positively sloped. In other words, I think they mean more of a right angle recovery, vs a bounce shaped recovery.
We are clearly in a global deflationary collapse already. Global trade literally dropping to zero. Literally.
https://www.superstation95.com/index.php/world/750
Once the FED carries out its promised 3rd or 4th rate hike, the US will enter Hyper-Deflation, which will be interesting to watch. Anyone know how to go long bankruptcy lawyers?
We are clearly in a global deflationary collapse already. Global trade literally dropping to zero. Literally.
https://www.superstation95.com/index.php/world/750
Once the FED carries out its promised 3rd or 4th rate hike, the US will enter Hyper-Deflation, which will be interesting to watch. Anyone know how to go long bankruptcy lawyers?
A market without a constant influx of freshly minted money? Why that's crazy talk!
So, sounds like China wants to let things rot for awhile and crush the Kyle Bass shorts (the long flat part of the 'L' shape), before eventually weaking their currency (the upswing of the 'L' shape).
V - shaped growth the rebound not happening? Well it was only printed anyway.
L - shaped growth, the flatline where they will still be printing but only enough to go flat.
Maybe it will be the | - growth one, that is off a cliffside and vertical DOWN.
China needs to tell the west, you want growth you going to have to pay for it yourself ... ha ha ... that I reckon is more likely to happen because if we are not buying whatever China does will be dire.
When Han Jun said
clearly he was referring to the bottoming of the DJIA in March 2009.
I have never heard anyone refer to the V-shaped recovery of the American economy. Have you?
If anything, the American economy is in a triple-dip recovery; nothing you can sink your teeth into.
The V-shaped recovery of the stock market was truly one of the colossal blunders by the Fed in the aftermath of the subprime bubble bust.
The idea was to stimulate demand by giving the already prosperous even more wealth through their 401(k)s and eliminate any concern they may have had about the immanent arrival of tempi brutti.
Early in 2009 the value of all 401(k)s was under $2 trillion. In May 2015 that total was somewhere between $5 and $6 trillion.
If the QE printings had gone to create work at the bottom of the economic totem pole, the banks, the Wall Street firms, and the already well-off would not be as flush as they are now, but the bottom-up recession now threatening all of us, would not have gained traction and our recovery would be more than a big number of the DJIA.
I hope the big boys in China see the golden opportunity before them.