Last week China's central bank (the PBOC) cut borrowing costs for the sixth
time in a year and eased the reserve requirement ratio (RRR) for the third
time this year, in a desperate attempt to achieve the prescribed growth target
of 7% off the back of ever-increasing credit issuance. The PBOC lowered the
one-year benchmark bank lending rate by 25 basis points to 4.35%, the one-year
benchmark deposit rate was also lowered by 25 basis points to 1.5%.
In addition to this, the RRR was cut by 50 basis points for all banks, bringing
the ratio to 17.5% for the biggest lenders, while banks that lend to small
companies and agricultural firms received an additional 50-basis-point reduction
to their RRR.
This latest round of easing followed a report showing that despite a surprise
devaluation of the yuan in August, economic growth in the third quarter was
the slowest in six years. Goldman Sachs Group Inc. estimates the easing will
release 600 to 700 billion yuan ($94 billion to $110 billion) into the financial
system, keeping borrowing costs at the regime's all-time low.
These destabilizing moves come on the heels of a steep stock market decline
in August and concerns that Communist China's growth fairy tale has come to
an unhappy end. Here are some troubling economic statistics about China's growth
aggregated by Zero Hedge:
- China export trade: -8.8% year to date
- China import trade: -17.6% year to date
- China imports from Australia: -27.3% year over year
- Industrial output crude steel: -3% year to date
- Cement output: -3.2% year over year
- Industrial output electricity: -3.1% year over year
- China Manufacturing Purchasing Managers Index: 49.8 (below 50 is contractionary)
- China Services Purchasing Managers Index: 50.5 (barely in growth category)
- Railway freight volume: -17.34% year over year
- Electricity total energy consumption: -.2% year over year
- Producer price index (PPI): -5.9% year over year, 43 consecutive months
of declines
- China hot rolled steel price index: -35.5% year to date
- Shanghai Stock Exchange Composite Index: -30% since June
Yet despite data points that indicate a significant slowdown in growth, China
alleges it had a 6.9% growth rate in the 3rd quarter. Unfortunately, fantasy
GDP numbers don't feed the masses or calm social unrest. Recent actions from
Beijing clearly indicate China is more concerned about avoiding a recession
than it is about raising GDP growth above its supposed current 6.9%.
But here's a news flash for the Communist nation and all other global fiscal
and monetary planners: Money printing and government deficit spending doesn't
lead to viable economic growth.
For years China bought into to the popular Keynesian myth that mindless government
spending spawns sustainable long term growth. In order to fabricate a consumer
class to rival the United States, the government built cities, bridges and
airports with no viable productive value. Unfortunately, they are now reaping
the downside of investing in non-productive assets: when the feckless spending
ends you are left with non-productive assets, but still stuck with the debt
that was used to erect them.
But this misallocation of capital has not only left empty cities, but empty
pockets as well. Many of the loans used to finance idle construction will never
get repaid; yet these banks continue to roll over these loans in the same manner
as Japan's 1990's Zombie banks.
Most importantly, what the PBOC, ECB, BOJ, Fed et al, all fail to understand
is that cutting the cost of money and flooding the banking system with credit
only leads to the piling up of excess reserves on central bank balance sheets.
The point here is that lowering interest rates and cutting the cash to deposit
ratio doesn't lead to a huge increase in consumer borrowing when the private
sector of the economy is debt disabled. And even if governments were able to
increase the money supply and the rate of inflation, it would only lead to
more capital imbalances and the further evisceration of the middle class-not
viable growth.
The economies of the developed world have been living under the fantasy that
if you can shove more credit upon debt-disabled consumers the economy will
be saved from slow growth and deflation. Increasing the purchasing power of
consumers is actually essential for true economic healing to occur, but that
is anathema to those that currently hold sway.
Since the government mandated inflation and growth goals have not been achieved
after seven years of unprecedented efforts, I believe central banks will soon
resort to completely circumnavigating the banking system and directly force
credit onto the public sector. But that still won't lead to economic nirvana...instead
it will ensure that the economy will suffer through its first worldwide inflationary
depression.
