BarroMetrics Views: An Inflection Point
Turning on the popular channels, we see and hear “economically and politically, the US is fine, the rest of the world? Well, that is a different story”.
But I wonder………
Let’s have a look a China. It was the country that prevented the world from sliding into an economic armageddon in the 2007-2008 crisis. The US and Europe may like to think otherwise – they may like to think QE saved the day; without Chinese support, the efforts would have come to nought.
But now…..??….The latest news from Guandong suggests that China is caught between needing to stimulate the economy and risking strong inflation, or letting the economy slide into recession. Guandong is a measure of China’s economic health e.g. it accounts for nearly 25% of China’s foreign trade
The first quarter results showed weak economic output growth and a decline in regional exports. Moreover what growth we did see may have been inflated because of Guandong’s practice of exaggerating product shipments to gain ‘interest carry trade’. (The locals use the inflated figures to secure a LOC from Chinese banks; then then use the LOC to secure foreign currency loans from HK banks; finally the convert the foreign currency to yuan and invest in China’s shadow banking wealth management products).
Moreover, Prasenjit Basu argues that any further stimulus now will only postpone the inevitable crisis and in the process, cause a much greater one because:
- The largest monetary expansion in history is coming up against a declining working-age. He argues that to sustain an economic growth of 7%, productivity would have to grow by 6%-7%. This is probably beyond China because half of its economy is labour intensive.
- China suffers from excess capacity in most industrial sectors. Yet, thanks to the monetary expansion, investment in fixed assets continues to grow at double-digit rates while much of the present capacity stands idle.
He concludes by saying that China’s economy is in an unbalanced state. To avert a wider deflationary spiral, the country needs to wean itself of the false cure of perpetual policy stimulus. Perhaps the US and EEC should take head.