The China deflation story is one that you all should expect to see more of in the media over the coming months. Allow me to quickly explain why prices throughout China remain depressed.
For those who’ve not heard me say this before, allow me to repeat. “Keynes is Dead in China”. Contrary to whatever you might have seen or read, there’s been no massive fiscal response out of Beijing. Yes, there’s been a firehose of debt issuance, but very little of it has been for the purpose of fiscal support.
A few points to make. There has been zero fiscal support provided to Chinese households. Beijing did just that, indirectly mind you, during the 08/09 financial crisis and it not only blew a hole in China’s overall fiscal position, so too was it the case that malinvestment surged. That mistake wasn’t going to be repeated again.
Beijing leadership is also well aware of just how precarious the fiscal position is among the G7 nations. This has been a known quantity for at least a decade. The thinking here is that if China were to “eat bitterness” today, then the country would be in a (relatively) stronger position at the very time the G7 nations succumb to their own debt crisis.
But what of all the stories that China has unleashed its own printing press. There are two points to be made on the count.
First, the majority of the proceeds from the bonds issued are being deployed to regional governments with the sole purpose of cleaning up local government financing vehicles (LGFV). There’s been a truck ton of “off balance sheet” debt built up over the past 20 years and Beijing has been aggressively working to restructure the debt.
Second, given that the ongoing restructuring of the entire Chinese economic model has resulted in slowing activity has meant lower tax receipts. The fiscal hole is being plugged through the debt issuance you’ll see written about in the media. Here, again, this isn’t stimulative. The proceeds from the bonds issued are just being used to pay the governments ongoing bills.
It is completely unclear if the steps being taken by Beijing will lead to a more stable and stronger economy. While I can state that we, here, in China are past peak pessimism there does remain a giant question of this plan will ultimately work. For myself, it is clear that Beijing recognized that they had a problem and have taken steps to arrest that problem. Now we just wait to see if it all works.
