It would funny to watch as Chinese policymakers attempt to pull off the impossible if it weren’t so downright frightening.
Beijing, long the global engine for growth and trade, finds itself at a rather vexing crossroads. NBS protestations to the contrary, the Chinese economy is decelerating rapidly in the face of a massive rebalancing towards consumption and services-led growth. The country’s move away from a smokestack economy has for all intents and purposes reset assumptions regarding how we think about global trade.
When the perpetual commodities bid from China disappeared, it became quickly apparent that sluggish growth may simply be something the world has to live with for the foreseeable future - especially considering the malaise gripping Brazil and Russia and uncertainties around whether or not India will be able to carry the entirety of the BRICS’ burden.
The problem for the Chinese is that although they have far greater counter-cyclical policy room than does the US or Europe, they’re effectively hamstrung by a massive debt burden that amounts to more than 250% of GDP. You don’t necessarily want to go adding more leverage at a time when an acute overcapacity problem and the attendant slump in commodities has created a situation wherein entire swaths of the industrial sector aren’t able to service their existing debt.
But without more leverage, the economic deceleration becomes even more acute. Which leads us to the conclusion we drew long ago: China is attempting to deleverage and re-leverage at the same time - and that’s obviously impossible. You can see examples of this policy schizophrenia everywhere. For instance, in January, TSF grew by a massive $500 billion and yet meanwhile, Beijing is busy discussing how to kill off unprofitable, highly indebted “zombie companies.”
The proverbial cherry on top is the yuan devaluation debacle which makes it difficult for the PBoC to ease further if they want to avoid exacerbating expectations of a much weaker currency - expectations that led directly to massive capital outflows last year.
It’s with all of that in mind that we bring you comments from two prominent Chinese officials, People’s Bank of China Governor Zhou Xiaochuan and Xiao Yaqing, who oversees the government commission that looks after state assets.
Speaking on the state of the Chinese economy and whether the PBoC will ultimately be forced to do more if things continue on the trajectory they’re on, Zhou did his best to put on a brave face. “Excessive monetary policy stimulus isn’t necessary to achieve the target,” he said, referring to the country’s 6.5% growth goal over five years. “If there isn’t any big economic or financial turmoil, we’ll keep prudent monetary policy,” he added.
Someone apparently forgot to tell Zhou that there indeed is quite a bit of “big economic and financial” turmoil and it emanates from China in the form of the collapsing economy and the carnage wrought in global markets by the bank’s bungled attempt to devalue the RMB.
In any event, he had other soothing words for a market that increasingly looks at China more as a source of turmoil than as the bedrock of the global economy. “There’s no need,” he said, “for anyone to buy dollars in a rush” even though the PBoC is “unable to forecast if the yuan’s volatility will end.” Further, “China won’t rely on exports for GDP growth, [but will instead] depend on domestic demand.” Good luck with that. It’s going swimmingly so far.
If all of that doesn't make you feel better about China's prospects, then just ask the abovementioned Mr. Xiao how things are going with the effort to avoid bankruptcies and thus massive layoffs at SOEs.“The results have been quite good,” he told reporters on Saturday. "Over the past year, the government engineered the merging of 12 big state firms into six entities, mostly in energy and transportation," WSJ writes, adding that "Mr. Xiao said his agency would press ahead with 'more mergers and acquisitions' in the state sector while de-emphasizing bankruptcies."
China definitely "won’t experience a wave of layoffs," Xiao promised.
Over the past several weeks, China has been keen to play down the extent to which eliminating excess capacity would trigger sweeping job losses after Li Xinchuang, head of China Metallurgical Industry Planning and Research Institute told Xinhua that solving the overcapacity problem would likely cost 400,000 jobs and could plunge the country into social unrest.
As WSJ goes on to note, reforming and restructuring won't be easy: "In years past, Beijing has sought to improve state companies’ efficiency through consolidation, with little success. For example, the government of Hebei province, which rings Beijing, merged two major steelmakers to create Hebei Iron and Steel Group. That firm went on to scoop up more companies but is now mired in losses and debt."
"[There are] unprecedented difficulties and challenges,” Zhang Xiwu, one of Xiao's deputies admits.
Amusingly, an Op-Ed by Joe Zhang that appeared in FT this week argues that SOEs may be a better answer than QE, ZIRP, and NIRP when it comes to shoring up the economy. "But there are other ways of stimulating demand. Why, for instance, do western governments refuse to set up state-owned enterprises that will create jobs?," Zhang asks. "Are they really so much worse than QE and low or negative interest rates?"
Well, maybe not - except when they become massively indebted, fail, and everyone gets fired. When that happens then yes, yes they probably are "so much worse" despite the many perils of unconventional monetary policy.
As we wrote when discussing Li Xinchuang's comments regarding employment in the steel industry, "just how disconnected from reality China's official unemployment rate is, both now and one year from today, will ultimately determine how violent the social upheaval will be when - as part of its hard-landing - China proceeds to lay off (tens of) millions of low-skilled workers leading to the inevitable violent response."
It would be a small (actually scratch that, a "very large") miracle if Beijing is able to restructure the economy's collection of elephantine SOEs without creating an employment crisis. And if, as Zhou says, China intends to depend on domestic consumption rather than exports to fuel growth, then the PBoC had better get to explaining how exactly it is that hundreds of thousands of recently jobless factory workers are going to be able to be power the hoped-for but still nascent transformation.