China: A Paper Tiger In A Fragile Economy
China: A Paper Tiger In A Fragile Economy By: Andrew Moran for Liberty Nation
We typically imagine the Chinese entrepreneur crunching numbers, working around the clock to boost the economy, and repeating Communist propaganda about the West being the supreme devil. But we might have it wrong. Considering that the major source of funding for tens of thousands of companies in China originates from the central bank’s printing press, the reality could be businessmen and employees getting plastered on baijiuand beating each other to death with Pokémon cards during office hours. Think of it as the Eastern version of The Wolf of Wall Street.
The Three Rs
The People’s Bank of China (PBOC) recently announced that it would inject $126.35 billion into the financial system by cutting the reserve requirement ratio – the number of reserves that financial institutions are mandated to hold. This represents the seventh reduction to the RRR in the last 18 months, totaling $510 billion in net liquidity.
According to the central bank, the RRR will be lowered by 50 basis points for all commercial banks, effective September 16. Smaller institutions will be given one additional percentage point. The RRR for larger organizations will be dropped to 13%. PBOC officials are attempting to spur lending, economic activity, and financial support as the world’s second-largest economy continues to slump amid its trade war with the US.
In a statement, the bank assured markets that it will maintain a conservative monetary policy and will not flood the economy with stimulus. However, officials did say that they will increase counter-cyclical adjustments and extend immense volumes of liquidity when necessary.
Even prior to the trade war, the Chinese government had employed a series of measures to reverse the slump. Thanks to the dispute with the Americans, Beijing’s growth prospects are bearish, projected to fall to a 30-year low of 6.2% in the second quarter of 2019. Because of this, analysts anticipate the PBOC will impose another 50-basis-point RRR decrease. In addition, observers prognosticate that the central bank could cut at least one of its key policy interest rates later this month. This would be the first time since 2015.
The routine intervention and stimulus have ostensibly metastasized the economy into an addict, reliant on its next fix. So, can the Chinese economy survive without the state?
Every Yuan Needs Debt
In the last five years, China’s M2 money supply – a measurement of the money supply that includes cash, checking deposits, and liquid assets – has ballooned 120%. Since the country is being paralyzed by the trade spat and other negative trends that threaten its foundation, China is not showing any signs that it is ready to hit the pause button on money-printing. In fact, judging by previous remarks by PBOC heads, Beijing might rev it up even more, especially if the downturn intensifies.
But can China print to infinity? It may have to because seemingly every area of the economy counts on being propped up by the Communists through cash injections, stimulus projects, and bailouts.