The Chinese government commands the economy to grow
Many people like to sort countries’ economies as either communist, socialist, capitalist or free markets. But these days, every country has some version of a mixed economy. The practical implementation of fiscal and monetary policy is becoming increasingly more grey than our old black-and-white economics textbooks would have us believe. Yet, even within the grey, China’s approach for its economic system is uniquely difficult to define.
Back in 1962, when asked about building a socialist market economy, future China leader Deng Xiaoping famously said, “It doesn’t matter whether the cat is black or white, so long as it catches mice.”
Well, the current China leaders have let the fiscal and monetary cats out of the bag, and they’re hoping those cats are hungry.
We wrote about China’s housing problems about a year ago, warning about rising deflation fears. These issues seem to have gotten worse, and the biggest news in world markets this week was that China’s government decided enough was enough. And in a “command” economy (which is probably the most accurate way to describe its approach), the government has a very high degree of control over economic levers. Consequently, markets reacted swiftly and positively to this news.
Here are the highlights of the multi-pronged fiscal and monetary stimulus that the Chinese government has decided to implement:
- Banks cut the amount of cash they need in reserve (this is known as the reservation requirement ratio) by 0.50%. This will incentivize banks to lend more money (basically “creating” 1 trillion yuan, USD$142 billion).
- The People’s Bank of China (PBOC) Governor Pan Gongsheng said another cut may come later in 2024.
- Interest rates for mortgages and minimum down payments on homes were cut.
- A USD$71 billion fund was created for buying Chinese stocks.
That last point is pretty interesting to me. Here you have a supposedly communist government essentially creating a big pot of money to spend within a free stock market. The fund is to directly purchase stocks, as well as providing cash to Chinese companies to execute stock buybacks. Good luck defining that action in traditional economic terms.
The idea is to give investors and consumers faith that they should go out there and buy or invest in China’s expanding economy. Clearly something major had to be done to jolt Chinese consumers out of their malaise.
Early reports are speculating that the Chinese gross domestic product (GDP) could fail to rise by less than the 5% target set by the government. If so, we’re about to see what happens when the commander(s) behind a command economy decide that the GDP will rise no matter what.