Nowhere is the “dollar’s” effects more damaging than in any real economy dependent upon it. It is quite fitting that on a day when the PBOC surprises with a desperate move to reduce the RRR for big banks, who have already been for some time the outlet for massive RMB liquidity, Chinese officials release economic statistics that show little or no benefit from all that. You would think that after trillions in RMB in addition to a huge burst in fiscal spending that some stirring of acceleration would be evident by now, but it simply isn’t.
Gross domestic product for Q4 2016 was up slightly to 6.8%, just a little more than the rate of 6.7% for the full year, but that is a fake number that nobody really takes seriously for good reason. You do have to wonder, however, that if the Chinese are so precise about making their targets how much worse it might be in reality. That question applies to more than just GDP, where Industrial Production, for example, has been stuck around 6% for 22 months – of the last nine, it was either 6.0% or 6.1% in six of them. Such little variation has become normal for IP in these distinct and obvious phases after the 2012 slowdown, though it does elicit some doubt that perhaps industrial output in China is appreciably lower than that, and to keep IP at 6% is simply the highest level officials might be comfortable faking (9% would be too outlandish?).
If industrial production were actually accelerating, on the other hand, Chinese officials would be the first to highlight it and use it as proof of the success of policy measures. So we know that Chinese industry has not responded either to internal Chinese “stimulus” or the supposed acceleration in “global growth.” Instead, we are left with questions and doubts as to whether last year might actually have been worse despite “stimulus.”
Either 6% or 9% remains a big problem in China, as it is more like the pre-modern China than the mature economy most people, including the Chinese, were expecting. Again, without the smallest indication of hastening here, the economic base, which remains industry despite continued conjecture of “rebalancing” to a consumer economy, is nothing like what it “should” be.
Retail sales, like Industrial Production, have also been almost perfectly sideways (in terms of the annual growth rate) over the past few years. More monthly variation has been estimated, but since slowing appreciably to start 2015 retail sales growth has been confined to a narrow range between 10% and 11.1%, with only one month out of the last twenty-three violating it. Once more, no acceleration despite “stimulus.”
While 10% or 11% growth sounds terrific given the developed world’s struggles to get anything near that, it is still more pre-modern than the rebalancing development away from China’s industrial past (now that it appears there is no going back to 2006, even though that was the plan all along up until 2013). Retail sales were regularly 10% in the late 1990’s before the eurodollar saturation, suggesting little more than the cliché of what goes up must eventually come back down (particularly when based on the soft foundation of artificial monetary expansion).
Even in the sectors where “stimulus” was more directly aimed and applied the response has been muted. To start 2016, Chinese government officials poured tremendous resources through the Fixed Asset Investment (FAI) of State-Owned Enterprises. They did so in obvious panic as private FAI was crashing, to try to turn around and restart the social as well as economic engine of urbanization. Yet again, despite all the massive intervention in various places the private market for investment remained dangerously soft throughout, and in the last two months of the year started to fall back all over again.
With State Sector FAI pared back (sharply) toward the end of 2016, it might be that for whatever small multiplier obtained on the private side never actually stimulated private capex investment apart from that state run spending (in typical “stimulus” fashion). In other words, construction “stimulus” didn’t actually change anything apart from temporary follow-on spending that is related more to what the State Sector is doing than the positive shift in private investment intentions that all “stimulus” seeks.
By these counts, then, China is much worse off to end 2016 than when it began it. The economy remains just as weak in 2016 as it was in 2015, only Chinese authorities have now proved they couldn’t change that. Despite the expenditure of funds and monetary effort, they achieved nothing of note apart from raising even further questions about the validity of their data and thus the actual stability of the economy. Even economists will occasionally acknowledge that a good part of “stimulus”, if not the majority part, is in credibly affecting expectations and outlooks.
More importantly, having witnessed authorities conducting serious and very determined programs, the private sector in China must ask itself, “now what?” The PBOC is increasingly desperate in its actions, and Chinese officials don’t appear willing to go further in 2017 in terms of fiscal activities or anything else. Instead, comments from authorities continue to suggest downgrading economic conditions couched under reform; that China will have to accept lower growth (though still at the official GDP target, of course) not because there is too much debt (though there is) but because they don’t have any more answers. Like the Fed after a fourth QE, there isn’t much else in the orthodox textbook left to be done. Have the Chinese embraced “secular stagnation”, too?
I have to think there is some nontrivial chance they have, and thus this is a cautionary tale to “reflation” enthusiasts counting on the new Trump administration to do in 2017 (or really 2018) what China did in 2016. The world has bigger problems than can be fixed by “stimulus.” The biggest one, the most immediate, seems to be that in the failure of it all economists and the politicians they influence (all of them) rather than take that failure as a signature of their own efforts and theories instead proclaim it as a sign of permanent impairment without any solution. That is what “secular stagnation” as a theory truly is, as it says no growth is the best that can be achieved and therefore official efforts must now be directed toward figuring out how to live under that condition.
The problem is, of course, the world simply cannot, and I suspect will not. It is a false conclusion constructed of dubious and self-interested terms, a sudden cynical turn that is as dangerous as it is absurd.
There is great opportunity still to be unleashed, if only we would stop listening to economists. They have spent the better part of the last ten years peddling only false hope, only to now turn around and suggest because they, specifically, didn’t succeed there is no hope. The variable to be excised from the equation isn’t optimism, it is Economics.