China's Leadership Calls for Courageous Economic Actions
A recent extraordinary Politburo meeting in China emphasized the need for a strong benchmark for selecting and employing people, the implementation of the 'three exemptions', and support for those who take responsibility and get things done. The leadership's intentions were clear - those who show the courage to take responsibility and innovate will be rewarded. The policy guidance includes a waiver for responsibility and punishment for those who act accordingly.
The Politburo's actions were in line with the sweeping measures taken by the central bank, which included rate cuts, property loans for unsold homes, and equity buyback facilities. These policies highlight China's determination to maintain firm control over its economy, directing the capital of savers rather than relying on the invisible hand of the market.
China's Economic Challenges
China's economy is currently burdened with unsold homes, unfinished projects, and unused land, totaling a staggering $4.1 trillion at mid-year. This isn't the first financial challenge for China, as it has previously navigated hurdles such as restructuring the FX market in 1994, bank overhauls in 1998 and 2004, asset management crackdowns in 2015, and the COVID response.
Previously, financial repression and the central bank's balance sheet have helped soften these shocks. However, as China's economy grows more complex, maintaining control becomes increasingly difficult. The global economy is infinitely more complex and cannot be managed through sheer willpower alone.
The Need for Economic Reform
Real courage is required for reform, not stimulus. A good economy is one that works for the many, not the few. Markets have a way of identifying and enforcing necessary reforms for that outcome, and nations that heed this call will strengthen their standing - near-term pain for long-term gain. After all, no country can simply inflate its way to prosperity.
China's "Courage Economy"
At a recent Politburo meeting, Xi conveyed the need for party members and cadres to take responsibility and dare to innovate. The meeting was held earlier than usual, reflecting the gravity of the situation. The Politburo introduced a rare “responsibility and punishment” waiver, offering protection to officials willing to embrace Xi’s challenge. This marks China’s “whatever-it-takes” moment, where pragmatic policies take precedence: a good economy is one that works.
China's Economic History and Future
China's economic reforms began in 1979, with a focus on pragmatic policies. China has managed to execute these policies effectively, with its share of world GDP rising from 2% in 1980 to nearly 20% today. This was achieved through a strong emphasis on domestic control—a policy that does not scale well.
China's gross national saving rate is falling, shrinking the pool of capital available to plug financial holes in an increasingly complex economy. Leaders cannot strengthen an economy by willpower alone—incentives do the heavy lifting. Financial repression merely defers problems to the next generation, a global issue with more immediate consequences for China’s shrinking population. The time for a new trap to catch the mice may soon come.
China's Global Economic Impact
China's economic policies and actions have a significant impact on the global economy. The country's shift to pragmatism in 1979 marked a pivotal moment in its economic history. China's appearance at the 1979 World Economic Forum marked the beginning of its new economic era. Since then, China has managed banking crises internally and adjusted its economic policies on its own terms.
China's economic actions are not just about currency or trade, but about a nation’s unwavering commitment to its vision of the future, one strategic step at a time.
Bottom Line
China's economic strategies and policies are a testament to the country's determination to maintain control over its economy. However, as the economy grows more complex, the effectiveness of these policies may be tested. The need for economic reform, not just stimulus, is apparent. The question remains: will China's "whatever-it-takes" moment work in the long run? What are your thoughts on this matter? Feel free to share this article with your friends and engage in a discussion. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.
