The Chinese government is ordering the economy to grow
Many people wish to divide their countries’ economies into communist, socialist, capitalist or free markets. But today every country has some form of mixed economy. The practical implementation of fiscal and monetary policy is becoming increasingly grayer than our old black and white economics textbooks would have us consider. But even throughout the gray area, China’s approach to its financial system is uniquely difficult to define.
Back in 1962When asked about constructing a socialist market economy, future Chinese leader Deng Xiaoping said: “It doesn’t matter whether the cat is black or white, as long as it catches mice.”
Well, the present Chinese leaders have let the fiscal and monetary cats out of the bag and are hoping those cats are hungry.
We wrote about China’s real estate woes a few yr ago and warned of growing deflation fears. These problems appear to have gotten worse, and the most important news in global markets this week was that the Chinese government has decided enough is enough. And in a “command economy” (which might be probably the most accurate method to describe its approach), the federal government has a really high degree of control over the economic levers. Consequently, markets reacted quickly and positively to this news.
Here are the highlights of the multi-layered fiscal and monetary stimulus that the Chinese government has decided to implement:
- Banks reduce the amount of money they need in reserve (this known as the reserve requirement ratio). 0.50%. This will incentivize banks to lend more cash (mainly “creating” 1 trillion yuan, $142 billion).
- People’s Bank of China (PBOC) Governor Pan Gongsheng said one other cut could come later in 2024.
- Mortgage rates of interest and minimum home down payments have been reduced.
- A $71 billion fund was created to purchase Chinese stocks.
The last point is sort of interesting to me. Here you might be coping with a supposedly communist government that is basically making a large pot of cash to spend on the free stock market. The fund is designed to purchase stocks directly and supply money to Chinese corporations to perform share buybacks. Good luck defining this motion in traditional economic terms.
The idea is to present investors and consumers confidence that they can purchase or put money into China’s expanding economy. Clearly something big needed to be done to ease Chinese consumers’ discomfort.
Early reports speculate that China’s gross domestic product (GDP) may rise a minimum of the federal government’s 5% goal. If so, we’re about to see what happens when the commanders behind a command economy resolve that GDP will certainly rise.
