China’s Economic Miracle

June 27, 2018

China over the last 20+ Years has experienced a Financial, Industrial, and Technological Revolution like no other country in history. More people have been lifted out of poverty in a shorter period of time than any other in history. They now have more Millionaire’s then any other country. The size of their economy has surpassed every economy in the world, except for the US. The Peoples Republic of China has an economy that has more than tripled since 2000. Tripled! No country has ever grown as fast and as long without a recession as the Chinese economy has.

It may even be argued, as the CCP does, that the ‘Command and Control’ nature of the Chinese Communist Party (CCP) positively contributed to this Revolution in a manner that would not have otherwise occurred, i.e, a democratically elected popular government with free market capitalistic principles.

Even the decades of US growth leading up the US Depression is small compared to what China has achieved. When the Asian Financial Crisis occurred in 1998 China watched from the sidelines. It’s economy then was less than a quarter of what it is today. It was only last decade that China overtook Japan as the second largest economy after the US. Since that time China has more than doubled. China’s economy has doubled since The Great Recession started in 2008. When it came to Fiscal Stimulus in 2009, China’s was four times the stimulus the US provided in 2009.

The influence on how the Chinese economy has grown over this period has been controlled and directed by the Chinese Communist Party. This influence, until recently, seemed all powerful. As their economy has become more and more intertwined with the global economy their impact and control has decreased significantly.

In China all the primary banks are majority owned and controlled by ‘The Party’. Thus the ‘Allocation of Capital’ by the Peoples Bank of China (PBOC) to these banks and then to borrowers is controlled by, ‘The Party’. Most of the largest industrial manufacturers are also majority owned and controlled in the same manner as the banks.

It is widely understood that the combination of “New Deal” Fiscal spending and Military spending just before and during WWII brought the US out of “The Great Depression”. Up for argument, however, is the question of “Would the US have recovered from the Great Depression with just the New Deal and without WWII spending?” If so, “When?”

These questions are paramount when considering the Fiscal Spending impact on mitigating economic malaise and assisting in economic recovery.

Since the “Great Recession” US Fiscal Spending has increased on military, health, Social Security, and Medicare.

New Deal type Fiscal Spending on Infrastructure has not occurred in a meaningful manner. The ~$800 Billion in “Shovel Ready Projects” from 2009 did not have an impact on US GDP due to it being such a small actual percentage of GDP itself, less than 6% based on 14 Trillion GDP. As a % of GDP, China’s was almost 30%.

Where I am going with all this is this? China has been engaged in New Deal type of Infrastructure projects since the 1990’s. One of the first major projects being the ‘Three Gorge’s Dam’ on the Yangtze River.

What ‘If’, and I do mean ‘If’, China has already done most of the infrastructure projects and improvements their population and economy currently needs and will need for the next 20 years? What ‘If’, additional increases in Fiscal Spending by China on Infrastructure cannot and does not have a material impact on Chinese GDP?

If this is the case The “Multiplier” effect of spending on Employment, Consumption, and growth is lower, or maybe even non-existent, due to the “Law of Diminishing Marginal Return” and the “Law of Diminishing Marginal Utility”.

Once again, ‘If’, this is true, mostly true, or even partially true, then China does not have one of the primary fiscal tools normally available to governments when financial crisis and the ensuing recession occurs.

This concern isn’t about having too much debt, slow growth, or even a future financial/economic crisis/recession. This is about what can be done about it when it eventually happens.

China’s economy is transitioning, just like many say. Its transition is from “Very Fast” (+7% for Decades) to perhaps a “Slow”, with even a potential “Stop”, and a “Reverse”, in between! Defining ‘slow’ in percentage terms, with limited history to reflect upon, is anywhere from 1-4%. Forever. ‘Forever’, should be said slow to extenuate the importance of it’s meaning.

Is there anything wrong with this? Is it bad for an economy to do this? Is it not normal? The answer is of coarse, “No”. This is completely normal, natural, and healthy for an economy to experience.

It is however wrong how long the numerous Premier’s of China have pushed one of the greatest Economic, Technological, and Industrial Revolutions in human history.

This is all easy to say in hindsight. What they should do now that they are in this situation and how they should do it is terribly difficult.

Doing the right thing at the wrong time may not work just like doing the wrong thing at the right time does work…for a while. Sometimes.

It is a little easier knowing what to do, than when and how to do it.

Perhaps they should allow/devalue their currency by about 40%. Let it go, intervene, surprising at 8.5, 9, and then all in, all of us, at 9.5. The exchange rate is currently about 6.4586 per $1 (WSJ 6/20/2018) The Chinese Yuan/RMB US Dollar Exchange rate in the 1990’s was over 8 RMB per 1$. Maybe we’ll settle here once all the dust settles.

By all of us I mean exactly that. The Super Central Banks, “SCB’s”, US Federal Reserve, ECB, BOJ, BOE, IMF, et all.

These SCB’s would thus buy Trillions of Yuan’s (RMB) and Billions of Yuan denominated assets. In order to do this the SCB’s must sell Trillions of US Dollars, Yen, Euro’s, Pounds, and maybe even Gold too. The SCB’s in this scenario would be the ‘buyer of last resort’ for these assets.

A global currency intervention. Surprise! Yes, we live in a new world of intervention and salvation of not just one Central Bank, but all Central Banks. The old saying, “You can’t fight the Fed!” has been changed to “You can’t fight ALL the FED’S!”

Source: National Bureau of Statistics of China (2018), The World Bank (2018), Bureau of Economic Analysis (US Dept. of Commerce 2018)Wall Street Journal, Thompson One Financial

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