1/9
"China has pledged to boost credit to private companies and extend other funding measures to small firms to support the economy," according to Bloomberg. "Policymakers are focusing on how to rebuild confidence among private firms."
bloomberg.com via @economics
"China has pledged to boost credit to private companies and extend other funding measures to small firms to support the economy," according to Bloomberg. "Policymakers are focusing on how to rebuild confidence among private firms."
bloomberg.com via @economics
2/9
As with their policies aimed at boosting consumption, policymakers are mostly addressing the wrong problem. Private companies and small businesses are not mainly suffering from the lack of credit with which to expand production.
As with their policies aimed at boosting consumption, policymakers are mostly addressing the wrong problem. Private companies and small businesses are not mainly suffering from the lack of credit with which to expand production.
3/9
Most of them don't want to expand production because they already have more than enough capacity to meet demand. Their biggest problem is lack of additional demand, not lack of additional credit.
Most of them don't want to expand production because they already have more than enough capacity to meet demand. Their biggest problem is lack of additional demand, not lack of additional credit.
4/9
It turns out that the only sustainable way to solve both weak consumption and weak business investment is to implement policies that boost household income. One way to do so is to implement one-off measures that increase government transfers to households.
It turns out that the only sustainable way to solve both weak consumption and weak business investment is to implement policies that boost household income. One way to do so is to implement one-off measures that increase government transfers to households.
5/9
But this would involve more direct or indirect government borrowing, and so while it could create temporary improvement, which might become self-reinforcing if the improvement were to increase confidence and reduce household savings, ultimately it isn't sustainable.
But this would involve more direct or indirect government borrowing, and so while it could create temporary improvement, which might become self-reinforcing if the improvement were to increase confidence and reduce household savings, ultimately it isn't sustainable.
6/9
The sustainable way is to increase the GDP share directly retained by households, but of course this would at first be painful for manufacturers and local governments as the low household shares are the obverse of the massive direct and indirect subsidies they receive.
The sustainable way is to increase the GDP share directly retained by households, but of course this would at first be painful for manufacturers and local governments as the low household shares are the obverse of the massive direct and indirect subsidies they receive.
7/9
But no matter how eager they are for easy, temporary solutions, there are no easy solutions. For China to reduce its reliance on massive amounts of non-productive investment to drive economic activity, it needs a major rebalancing of the way income is distributed.
But no matter how eager they are for easy, temporary solutions, there are no easy solutions. For China to reduce its reliance on massive amounts of non-productive investment to drive economic activity, it needs a major rebalancing of the way income is distributed.
8/9
This rebalancing cannot occur without major corresponding changes in political, business and financial institutions. As the case of Japan illustrates, these changes are so difficult that it can take decades – and decades of low growth – to achieve them.
This rebalancing cannot occur without major corresponding changes in political, business and financial institutions. As the case of Japan illustrates, these changes are so difficult that it can take decades – and decades of low growth – to achieve them.
9/9
In the past year Chinese analysts have repeated very aggressively that China will not replicate Japan's experience, but until it stops trying to solve demand-side problems with supply-side measures, that is exactly what it is doing.
In the past year Chinese analysts have repeated very aggressively that China will not replicate Japan's experience, but until it stops trying to solve demand-side problems with supply-side measures, that is exactly what it is doing.
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