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...