‘China’s biggest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit…’
What? Who would’ve thunk it?! A command economy that doesn’t respond to commands. This isn’t how it’s supposed to turn out. China has tools…it’s meant to ‘fine tune’ the economy.
If you ever did believe that narrative, we have news for you – China’s economy is not an air conditioner. Just because it starts blowing hot air in the middle of summer, doesn’t mean you can just pull out the tool box and do some tweaking.
But that doesn’t stop the calls for more spending. Now, we’re told that China has room to cut interest rates…apparently to encourage more lending and spending. It won’t work. Lower interest rates will not lead to another lending resurgence…and it won’t encourage Chinese households to get into debt and to spend.
The increase in consumption that China so badly needs to rebalance its tottering economy requires higher, not lower interest rates. China doesn’t have a culture of personal debt like Western consumers do. China has a culture of saving. Those savings go into banks and the interest rate determines the return on those savings.
Lowering the interest rate lowers the return on savings. Rather than encourage Chinese households to spend, it could well have the opposite effect! That is, it could encourage households to save more to offset the lower return. At the very least it will push more savings into gold as the Chinese saver increasingly worries about preserving their wealth. China is not the West. Thinking of the relationship between interest rates, debt and spending in a western way and applying it to China is flawed analysis.
China’s post-2008 lending boom was made possible by the huge savings of its workers. Those savings formed the deposits and reserves of the banking system…which the government forced the banks to lend mainly to state owned enterprises to build infrastructure and housing.
And look where that’s got the Middle Kingdom now.
Of course it’s not all bad news. The US experienced its own credit bubble and bust in its fledgling years. They called the bubble the ‘Roaring Twenties’ and the bust ‘The Great Depression’. It took a decade or so to rebound, but it went on to become one of history’s most powerful empires. There’s no reason why China can’t go on to do the same.
The ‘gloomy China’ trade is becoming a little crowded. We warned Sound Money. Sound Investments subscribers about the coming China crash in October last year, telling them to get out of commodities. Now China bearishness seems pervasive (if still a little complacent). It’s time to move on…
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From the Archives…
The Physical Gold Market – From the Weak to the Strong
2012-05-18 – Greg Canavan
Why JP Morgan is Playing the Same Old Rigged Game
2012-05-17 – Eric Fry
Why Greece Can’t Afford to Stay in the Euro
2012-05-16 – Dan Denning
A Big Oops at JP Morgan!
2012-05-15 – Dan Amoss
Preparing For China’s Growth Slowdown With The ‘Energy Hub’ Portfolio
2012-04-14 – Dan Denning