Glory be to growth. Reality be damned, China will continue attempting to grow at unsustainable levels. That is the message from the Chinese Premier Li Keqiang given this Sunday during his Two Sessions speech. He decreed that annual GDP growth target is +6.5%, which is slightly lower than the recently reported growth of +6.7%, [ZH]
China is not alone in its adherence to the gospel of growth. Real growth can only be achieved by productivity and population gains. These two factors are very difficult to predict or command and control with success over a long period of time. Many have tried, all of have failed.
When in doubt, governments world-wide regardless of their economic “ism” resort to rampant money printing to goose up “growth” numbers. GDP measures of the flow of goods, it is a poor yardstick for the real health of an economy. With more money, more goods flow. Voila, growth!
China did miraculously transform itself over the last 30 years. However, recent growth is merely the result of aggressive money printing. The Party talks the talk about reining in credit growth; however, in practice they are impotent to stop it.
Xi Jinping is one of the most powerful Chinese leaders since Mao. However, even he cannot politically stop the expansion of bank credit. If he were confident in his ability to, he would proclaim a more realistic growth target.
Michael Pettis, professor at Peking University and former Bear Stearns bond trader, argues that real growth over the next 10 years cannot rise above 3% to 5% without a financial crisis. The financial crises is predicated on too much credit chasing too few positive yielding investments.
Beijing knows this. The PBOC continues to slay paper tigers by removing liquidity on hand, and increasing it in other ways. For Bitcoin traders, it means that one of the main drivers of global monetary policy will continue to act as they have done in the past.
Yuan liquidity and loans will continue to be provided to zombie state owned enterprises (SOE). The iron rice bowl must hold, or peasants will reassert their displeasure with immense wealth big city elites amassed by depressing wage growth and financially repressing savers.
Excessive Yuan liquidity will push up inflation. The escape valve will be a devaluation of the Renminbi. Premier Li implicitly confirmed that arguments I have been presenting for almost two years will continue to be relevant.
The Ides of March
The next “most important ever” Federal Reserve rate decision will ironically occur on the Ides of March. That is March 15th. Various Fed governors voiced support of a hike at the next meeting. Grandma Yellen in her recent speeches has done nothing to temper the rate hike talk.
Fed Funds futures price in an 80% chance of a March 0.25% rate hike. A rate hike would be devastating to China. [CME]
Beijing refuses to use political capital to put forward economic policies to rebalance growth. They refuse to drastically curtail banks’ issuance of credit. From Queen Victoria to Chairwoman Yellen, China is once again at the mercy of an old white lady.
The Fed rarely disappoints the market when traders price in a >75% probability of a rate hike. The S&P 500 is strong, and investors seem willing to ignore reality; case and point, the Snap IPO. The company’s expertise is losing money with style. Masochistic investors propelled the latest tech darling up over 50% from the IPO price.
The Fed has perfect rate hike cover. The amount of balance sheet pain the PBOC endures to save face internationally is unimaginable. Calm must remain before the October National Congress. The lack of a pressure releasing devaluation in the face of a market assured rate hike, means when it comes it will be enormous.
The Bitcoin angle is well known. USD up, CNY down, Bitcoin moon!