Tuesday, August 25, 2015

Is China in the Process of Ditching Keynesian Economics?

The Keynesian response to the current stock market crisis in China, and the overall downturn in the economy, would be to open the floodgates and print money Bernanke style.

This, of course, has major long term negative consequences and there are some indications China's central bank, the People's Bank of China, is not going to respond in Keynesian fashion.

Has the recent reluctance on the part of China's central bank to aggressively intervene in the Chinese economy, and stock market, been the result of a conscious effort to prevent the development of a crazed Keynesian roller coaster economy? Has someone within the higher echelon of the Chinese government been reading Austrian school economic theory, perhaps even  President Xi Jinping ,and decided that enough is enough and that the money printing madness must stop?

There is a fascinating report from Business Insider that suggests much political intrigue is going on in China and that the intrigue may center around the economy.

Linette Lopez writes:
We have reason to believe the unthinkable is happening to China's president

The one thing the West has taken for granted in China is that the Chinese Communist Party is unified behind its leadership.

But now, under the pressure of an economic slowdown and a stock market in free fall, we are likely seeing the CCP fracture in a way we've never seen before.

It seems some factions within the party are turning away from President Xi Jinping behind closed doors and at high-level retreats.

This is what we know.

Nothing that's run in China's state-run media is there by accident, and in the last few weeks the government has been sending less-than-veiled messages to power brokers, especially retired officials, within the party.

The message is simple: Back off.

"It should become a norm for officials to relinquish their power after retirement," said an editorial published earlier this month in government mouthpiece The People's Daily.

The government has the means to take down whoever it thinks isn't falling in line. Xi's regime has been engaged in a far-reaching anticorruption campaign for more than a year that many experts believe is his way of getting rid of any opposition and consolidating party power.

The People's Daily article made reference to that investigation and cited Zhou Yongkang — the country's former security czar and the highest-level official to be taken down since the days of Mao Zedong — as an example of someone who didn't know how to relinquish his power...

Meet 'Guoping'
 Then another editorial followed that openly called out people questioning China's attempt at economic reform known as "The New Normal." That was published across multiple publications, including the People's Daily.
The piece was signed by "Guoping," a pen name the government uses when it wants to get its point across.

"The New Normal" is the government's name for the inevitable slowdown that has come.. 
 It's a long-term reform play and, to many, one that's long overdue.

But it comes with major pain. Xi had prepped his people for lower growth, but no one expected the slowdown would come so hard and fast.

Some within the party, it seems, want Xi to turn back. The editorial last week was his way of saying "absolutely not."

"The in-depth reform touches the basic issue of re-configuring the lifeblood of this enormous economy and is aimed at making it healthier," said the editorial. "The scale of the resistance is beyond what could have been imagined."

The targets of the piece include not just retired officials, but also any official whose power has been weakened in the anticorruption investigation or who is upset about the austerity of "The New Normal."

Beijing-based political commentator Zhang Lifan told the South China Morning Post that the editorial was a sign that things were "not going well" and that a recent meeting of high-level party officials in the Hebei seaside resort of Beidaihe was tumultuous.

"Obviously they did not reach any consensus at the political activities in Beidaihe. Different groups are pursuing their own ways," he said. "This is a test of the leadership's ability to execute its mission."

The mad money printing of the past, of course, must result in liquidation of misdirected investments. And given the huge past money printing in China. the liquidations must be of major proportions. Thus, the question becomes, if China is really trying to end its dependence on mad money printing, do those in control truly have the necessary power to defend against the backlash that will develop from those who are damaged by the liquidations and will do anything they can to reverse the new prudent course.

If "The New Normal"is truly a turn against Keynesianism and a move toward prudent non-growth monetary policy then it may ultimately turn into "The Great Gift."



So  much for the People's Bank of China leaving markets along. The PBOC just cut rates.


  1. This is Capn Mike whose Google Account is not working as it should.
    This (China) can all be explained. You see, I met a Chinese Econ grad student on a plane. She was attending Pace. I gave her Joe Salerno's name and said "You gotta talk to this guy".
    You're welcome.

    1. Yup. Ol' Joe is the man! He's one of the best AEs out there.

  2. Let me know when China shuts down its central bank.

  3. C4L and Mises.org should send copies of Ron Paul books to every member of The Party.

    Like you, I fear the dislocation and disruption caused by the crash in China will be catastrophic economically, and at worst could cause another world war.

  4. Well the Chinese gov buying all of the gold has to have an end game, sound money makes as much sense as anything.

  5. I don't think they're adopting laissez-faire capitalism just yet.