{"id":1492966,"date":"2024-09-29T22:40:00","date_gmt":"2024-09-30T02:40:00","guid":{"rendered":"https:\/\/bugaluu.com\/news\/will-chinas-whatever-it-takes-moment-work\/1492966\/"},"modified":"2024-09-29T22:40:00","modified_gmt":"2024-09-30T02:40:00","slug":"will-chinas-whatever-it-takes-moment-work","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/will-chinas-whatever-it-takes-moment-work\/1492966\/","title":{"rendered":"Will China’s “Whatever It Takes” Moment” Work"},"content":{"rendered":"

Will China’s “Whatever It Takes” Moment” Work<\/span><\/p>\n

\n

By Marcel Kasumovioch, Deputy CIO of Coinbase Asset Management<\/em><\/p>\n

\u201cWe need to establish a strong benchmark for selecting and employing people, conscientiously implement the \u2018three exemptions,\u2019 and support those who take responsibility and get things done.\u201d This statement from the extraordinary Politburo meeting left no doubt about the leadership\u2019s intentions.<\/p>\n

Those who demonstrate \u201cthe courage to take responsibility and innovate,\u201d in Xi\u2019s words, will be rewarded, with exemptions, a \u201cresponsibility and punishment\u201d waiver for those acting on policy guidance. The thousands of financial executives who exited their positions and the Party since August serve as a reminder to those who resist.<\/p>\n

The Politburo followed sweeping actions taken by the central bank, in solidarity with PBOC governor joining the heads of the NAFR and the CSRC in announcing the measures. These included rate cuts, property loans for unsold homes, and equity buyback facilities <\/strong>– policies that underscore China\u2019s desire for firm control over its economy, directing the capital of savers like the strings of a puppet rather than relying on the invisible hand of the market.<\/p>\n

China\u2019s economy is cluttered with unsold homes, unfinished projects, and unused land, totaling an astonishing $4.1 trillion at mid-year. <\/strong>This isn\u2019t China\u2019s first financial hurdle: restructuring the FX market in 1994, bank overhauls in 1998 and 2004, asset management crackdowns in 2015, and the COVID response all showcased the country\u2019s approach to handling economic strains.<\/p>\n

Financial repression and the central bank\u2019s balance sheet softened these shocks before – and once again, this playbook of control is in motion. But as China\u2019s economy grows more complex, maintaining this control becomes increasingly difficult<\/strong>. The global economy is infinitely more complex and managing it through sheer willpower alone is impossible.<\/p>\n

Reform, not stimulus, requires real courage. And it\u2019s a global issue. 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<\/strong>.<\/p>\n

Courage: <\/strong><\/p>\n

\u201cThe vast majority of party members and cadres must have the courage to take responsibility and dare to innovate,\u201d Xi conveyed with urgency at this week\u2019s Politburo meeting. The timing of the meeting itself reflected the gravity of the situation, being held earlier than usual. The Politburo introduced a rare \u201cresponsibility and punishment\u201d waiver, offering protection to officials willing to embrace Xi\u2019s challenge. This marks China\u2019s \u201cwhatever-it-takes\u201d moment, where pragmatic policies take precedence: a good economy is one that works.<\/strong><\/p>\n

<\/a><\/strong><\/p>\n

The foundation of Xi\u2019s \u201ccourage economy\u201d was laid the day before:<\/p>\n

PBOC rate cuts will inject 1 trillion RMB in liquidity, while loans for unsold homes can now cover the entire purchase price.
\n\tThe downpayment requirement for second-home buyers was reduced to 15%, in line with first-time buyers.
\n\tMeanwhile, bank regulators committed to a more gradual increase in capital requirements, and specialized refinancing facilities were established to encourage equity buybacks.<\/p>\n

These coordinated actions signal a unified directive to stabilize the economy.<\/p>\n

Deng Xiaoping famously quipped, \u201cIt doesn\u2019t matter whether a cat is black or white, as long as it catches mice,\u201d <\/em>as China began its economic reforms in 1979. Desperate for an effective economy, China sought to balance traditional goals with pragmatic policies. Unlike many emerging markets with lofty objectives, China has managed to execute with its share of world GDP rising from 2% in 1980 to nearly 20% today. How did it avoid the pitfalls of past crises? Through a strong emphasis on domestic control \u2014 a policy that does not scale well.<\/strong><\/p>\n

Mousetrap: <\/em><\/p>\n

Take China\u2019s navigation of the 1990s Asia crisis. <\/strong>While its neighbors experienced fierce capital outflows, currency devaluations, and bank failures, China maintained its FX peg at around 8.33 to the US dollar. Stability masked material internal strain, with non-performing loans for Chinese state banks surging to 24% in 1998. But it was a domestic issue\u2014by 1997, FX reserves were eight times greater than short-term external debt<\/strong>. Banks were restructured, imposing losses on domestic savers through reduced returns and financial repression.<\/p>\n

The repression strategy was repeated in 2004 and 2016 and now underpins the latest policy measures. <\/strong>China\u2019s gross national saving rate is 43% of GDP, a captive audience given limited options for allocating their funds. As a result, these savers endure abysmal rates of return\u2014the dark side of financial repression<\/strong>. It\u2019s far from a free lunch. From bonds to stocks to real estate, this captive audience pays the price for policy through depressed returns. Market economies must do more with less, competing for global capital in freer environments.<\/p>\n

Will the \u201ccourage economy\u201d work? In the near term, almost certainly yes. But its limitations are equally clear. China\u2019s gross national saving rate is falling, shrinking the pool of capital available to plug financial holes in an increasingly complex economy. <\/strong>Leaders cannot strengthen an economy by willpower alone\u2014incentives do the heavy lifting. Financial repression merely defers problems to the next generation, a global issue with more immediate consequences for China\u2019s shrinking population. The time for a new trap to catch the mice may soon come.<\/strong><\/p>\n

Anecdote:<\/em><\/p>\n

“It\u2019s not the mindset of an emerging market. It\u2019s the mindset of an emerging superpower,\u201d said one of the greatest macro investors of all time to me, his eager protege.\u00a0 This time, it was China\u2019s FX revaluation making the headlines – not the investor\u2019s famous predictions of devaluations in the past.<\/p>\n

\u201cThe world mistakes China as ideological. 1979 marked the shift to pragmatism,\u201d he continued, referencing the pivotal moment when Deng Xiaoping opened China\u2019s doors to the world. \u201cIt doesn\u2019t matter whether a cat is black or white, as long as it catches mice,\u201d the protege eagerly recalled from Deng, encapsulating the shift to a results-driven economic policy.<\/p>\n

China\u2019s appearance at the 1979 World Economic Forum marked the beginning of its new economic era. Controlling inflation became a priority, achieved after 15 years of effort. The two-tiered foreign exchange system was replaced in 1994, laying the groundwork for a modern, integrated economy – though not without one last devaluation to prepare for the transition.<\/p>\n

China managed banking crises internally, with bank recapitalizations in 1998 and again in 2004. These were not the actions of a typical emerging market. \u201cDeng\u2019s approach seems almost ruthless in its pragmatism,\u201d I ventured. And only a decade after the last devaluation, the US Senate demanded an upward revaluation of the currency or else China would face a hefty 27.5% import tariff.<\/p>\n

Learning from Japan\u2019s painful experience after Plaza Accord, China adjusted on its own terms. \u201cChina is rewriting the rules,\u201d the investor remarked, his eyes narrowing as if seeing the threads of history weaving into the present. \u201cMarkets must read them carefully\u2026and politicians will need a heavy pen when editing.\u201d<\/p>\n

The revaluation proved a very profitable day. There were no celebrations, no false glory – just a relentless focus on what comes next, recognizing the shift in the global power dynamic. For China, it wasn\u2019t about winning a battle. It was about redefining the entire game. And I realized the true lesson. This was not just about currency or trade, but about a nation\u2019s unwavering commitment to its vision of the future, one strategic step at a time.<\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nSun, 09\/29\/2024 – 18:40<\/span><\/p>\n

\u200bhttps:\/\/www.zerohedge.com\/markets\/hedge-fund-cio-will-chinas-whatever-it-takes-moment-work<\/a>\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

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