When Money Printing Is Not Enough—–Beijing’s Emerging Rebuke To Orthodoxy

It still seems to be a matter of contention, but even the Chinese government may be seeking to clarify its “reform” stance in light of the orthodox baseline trying to reconcile the downward trajectory of the Chinese economy. That itself was somehow a great task, as all last year the narrative was, as the US, the global economy with China was “unquestionably” upon better and more favorable footing. Now that the slowdown is grudgingly accepted, there is still the tendency among economists and those delivering commentary to ascribe orthodox predispositions.

That is aimed squarely at the PBOC, a central bank that is confounding orthodox views on what “should” take place in the face of a downturn. The monetary textbook is clear on that account, you “stimulate” fast and furious regardless of any other factors. With the PBOC sitting upon the sidelines for many months, the dissonance has become deafening.

The PBOC itself has been quite open and honest about its part of reform, but that doesn’t seem to penetrate very far. I think part of that relates to the obfuscation that normally comes with any central bank, coupled with the fact that the PBOC has done at least partially what might be expected of an institution still running the orthodox playbook. But that only leads to greater confusion, as there have been rate cuts but also measures that would properly be deemed as “tightening.”

In recent weeks, there has been any number of rumors and suggestions about the PBOC “getting itself in the game.” But alongside that have been government statements clarifying that the Chinese official apparatus does not view the economy as the greatest danger. That is an astounding view in the world at this time, and you can understand somewhat why the mainstream does not just accept that since it flies in the face of everything that has been taught, proclaimed and even implemented going back more than a generation.

The emerging view is that the direct impact of government spending would work where monetary policy, including two cuts in interest rates and two cuts in bank reserve requirements since November, has not.


The government is eyeing “a package of measures to stabilize growth and control risks”, said a senior economist at the cabinet’s Development Research Centre think-tank.


“There is no big problem in employment. They (top leaders) are more worried about financial risks and debt risks.”

I can’t recall seeing a more concise and correct, in my opinion, view of what is happening in China, and certainly not in a mainstream fashion like through Reuters. I think that is related to the government in China being much more emphatic about what to expect about its ongoing (not relenting) reform. The PBOC is effectively sidelined as a matter of past mistakes (which may not have been initiated by the PBOC in the first place).

That has enormous implications about the state of not just China but the world and the global economy evolving in 2015. Monetary policy was run according to the textbook in 2009 as the Chinese version of “extend and pretend.” The intent was, as everywhere else, just to buy time until the true recovery arrived, to cushion the downturn so that there was no peasant revolt due to economic circumstances. Waiting for that recovery, especially from “demand” in the US, has been fruitless.

So the test of reform in China in 2015 is a direct reference to the lack of American “demand” and recovery, contrary to the major assessments that populate these mainstream opinions. Further, it means that the Chinese no longer are favorably disposed toward asset bubbles, judging that their past bubbles are the biggest sources of concern, risk and ultimately danger at this moment. The Chinese have awakened, contrary to central banks everywhere else, to the monetary menace and are seeking to manage the decline of these past monetary episodes before it ruins everything – and they are more than willing to accept, as they keep saying if anyone would actually listen, declining economic fortunes in the tradeoff.

There are so many contrary assessments in Chinese reform that it is no wonder it is not accepted on its face. However, the fact that the Chinese government is continuing on this path and is further emphasizing it is quite significant especially since so many expectations are for the PBOC to eventually “come to its senses.” Even the Communists are telling everyone to prepare for the downside of socialism in “money”, and the implications extend far beyond China proper.