The Chinese government is ordering the economy to grow
Many people like to organize the economy of countries as communist, socialist, capitalist or free market. But these days, every country has some version of a mixed economy. The implementation of monetary and fiscal policy is much grayer than our old black and white economics textbooks would have us believe. Yet, even within the gray, China's approach to its economic system is uniquely difficult to define.
Back in 1962, when asked about building a social market economy, China's future leader Deng Xiaoping famously said, “It doesn't matter if the cat is black or white, as long as it catches mice.”
Well, the current Chinese leaders have let out the financial cats and the wallet, and they hope those cats are hungry.
We wrote about China's housing crisis about a year ago, warning of rising inflation fears. These problems seem to be getting worse, and the big news in global markets this week is that the Chinese government has decided enough is enough. And in a “command” economy (which is probably the most accurate way to describe how it works), the government has a very high degree of control over economic levels. As a result, the markets reacted quickly and well to these news.
Here are the highlights of the multi-pronged fiscal and monetary stimulus that the Chinese government has decided to implement:
- Banks reduce the amount of money they need in the reserve (this is known as the reserve requirement ratio) by 0.50%. This will encourage banks to lend more money (basically “creating” 1 trillion yuan, USD$142 billion).
- People's Bank of China (PBOC) Governor Pan Gongsheng said further cuts could come as late as 2024.
- Mortgage interest rates and minimum mortgage payments have been reduced.
- A USD$71 billion fund was created to buy Chinese stocks.
That last point is very interesting to me. Here you have a so-called communist government creating a huge pot of money to use in a free stock market. The fund is to buy shares directly, and to provide cash to Chinese companies to use for stock buybacks. Luck explains that action in terms of traditional economics.
The idea is to give investors and consumers the confidence that they should go abroad to buy or invest in China's growing economy. Clearly something big had to be done to shake Chinese consumers from their malaise.
Early reports predict that China's gross domestic product (GDP) may fail to grow below the 5% target set by the government. If so, we are about to see what happens when the commander(s) behind the command economy decide that GDP will rise no matter what.
Source link
