Central bankers cannot be left in charge of monetary policy. Inevitably they fixate on exchange rates or inflation too much.
The Bank of Thailand is also too tight. The Bank of Japan is barely accommodative enough, and yet it seems to want to become too tight. The Fed is likely too tight presently.
The macroeconomics profession is a muddle on what is QE, when concurrent to fiscal deficits. Michael Woodford says QE+deficits is money-financed fiscal programs.
John Cochrane just wrote a bunch of posts that Japan had the perfect monetary policy for decades.
If you are not confused, then maybe you do not understand the situation.
Hi. Congrats on the new forum. I don't know if you follow your sibling substack "The East is Read", but it has some informative recent articles that seem on point to this subject:
(1) Xu Gao's case for stimulus -- Chief Economist of Bank of China International tears apart the opposition (parts 1 & 2)
(2) Ting Lu advises against common "cash handouts" proposal for China's economic slump.
FYI. ... "May a million readers bloom" for you here.
Xi Jinping is a textbook Communist stuck in 1960s era nostalgia for Mao and the Cultural Revolution. He’s obsessed with the Chinese equivalent of DEI policies, such as rural poverty alleviation and unprofitable BRI projects, rather than providing avenues for the smart and talented to grow the economy. Loose or tight monetary policy won’t make much difference.
To be simultaneously saving and investing too much is incoherent and points to issues with “too much.” Too much for Pettis may be just right for Chinese people.
I don't know if Pettis is correct, but there's nothing incoherent about the claim. Let's say China now saves 45% of GDP and invests 40% of GDP. Suppose Pettis wants both figures to fall to 30% of GDP. What's "incoherent" about that recommendation?
You second sentence is true, but keep in mind that these decisions are not just made by the "Chinese people", the government also plays a big role.
Why would China import US monetary policy when they have capital flow is restricted? The trilemma says a country can have 2 of 3 (free capital flow, free monetary policy, fixed FX). Since China restricts capital flow, shouldn't they be able to have both fixed FX and a free monetary policy?
Good analysis--large parts over my head--but the consistently bad monetary policy of China seems perfectly consistent with Xi's indifference to reality and his tendency to create a cult of advisors who cannot tell him that a different approach should be considered (The recent issue of The Economist had several articles on this). Could part of the problem be that he has thoroughly bought into the conventional fallacy that any type of loose money is a sign of undisciplined profligacy that begets moral hazard and leads to Zimbabwe/Weimar levels of decadence?
I appreciated Kirchner's comments on the irony of how Xi's professions of China's independence are at odds with their strong links to U.S. Fed policy. If they wanted to truly decouple they wouldn't be like Japan, they'd be like North Korea.
If, as you write (agree), china‘s natural rate has decreased, then this means that the ccp‘s growth target is unrealistic/too high. Should not, in this case, a lower NGDP target be assumed? Dont forget that the revised 4 percent target is still high by historical standards... if true, this could mean that the observed deflation is of the good sort..what do you think
"People view monetary policy as being in some sense about interest rates and the credit markets, whereas in fact it is all about the supply and demand for base money and the growth rate of nominal GDP."
It is neither. Those are possible policy instruments. The "policy" is about affecting some outcome like inflation or NGDP. The Chinese central bank is in the best position ot know whihc instruments to use to achieve what it wishes to achieve.
It would seem that a country with year over year CA surplus and a controlled exchange rate could easily create inflation.
Another thought. Has China’s export driven/consumption suppression model become too entrenched and gone to far? So far that domestic AD is now suppressed into a deflationary spiral?
Those are separate issues. The deflation problem is unrelated to the export driven model. Indeed a weaker yuan (nominal) would help to boost the price level.
Is this an example of the “monetary trilemma”? Has China’s commitment to a controlled exchange rate reduced its ability to focus monetary policy on domestic economic needs?
Is it correct to presume, that current combo of 4% NGDP growth + 5% real growth + 1% deflation is detrimental only to the extent that contracts were signed in anticipation of higher NGDP growth rate?
In that case I guess it's mainly debt contracts, because it's doubtful that there's a money illusion-type discontinuity at 4% wage growth for Chinese employees.
What kind of adverse effects, aside from bank failures, can current NGDP growth rate have for China?
Yes, but wage stickiness cause unemployment when nominal wages start falling, not when they grow slower then before, as far as I understand?
What if NGDP slowdown is deliberate, if not explicit PBoC policy? They know that they real growth is slowing, so previous double-digit rates of NGDP growth are not sustainable.
I understand, that if this deliberate slowdown is unannounced, it loses 90% of its effectiveness. But, still, they must make monetary policy tighter one way or another, and may be their inability to do forward guidance on future path of NGDP growth is their political constraint, so they're doing it "secretly"
BTW this reminds me of situation in Russia in 2010-2016, when Russian NGDP growth slowed down from around 20% to 4-5%. There were several high-profile bank failures, but unemployment situation was ok
In 1982, a slowdown in nominal wage growth in the US was associated with high unemployment, so it doesn't have to be an outright decline if high wage growth had been previously expected.
It would be interesting, if the PRC picked up ngpdp level targeting at 4% a year, and would then end up with slight deflation and yet a robust economy.
Btw, I don't think China is over-investing, at least not in general. They still have a long way to go before they are even as rich eg Taiwan (and Taiwan isn't as rich as eg Singapore). And part of that gap is surely explained by a relative lack of capital.
However China might not need more steel making capacity, or whatever else industrial policy is pushing these days.
I'm no expert on the subject, but I think it's mostly malinvestment in the wrong areas. But it wouldn't surprise me if they were also over-investing to some extent.
Yes, they still do need lots more capital in some areas. But for a country with a per capita GDP of only about $13,000 (say $25,000PPP) China already has some very impressive infrastructure. It seems to me that its high speed rail, highways, subways, airports, etc, are at least 70% to 80% complete.
Everyone, I added a few updates at the end of the post. I highly recommend the Stephen Kirchner post that I linked to.
Central bankers cannot be left in charge of monetary policy. Inevitably they fixate on exchange rates or inflation too much.
The Bank of Thailand is also too tight. The Bank of Japan is barely accommodative enough, and yet it seems to want to become too tight. The Fed is likely too tight presently.
The macroeconomics profession is a muddle on what is QE, when concurrent to fiscal deficits. Michael Woodford says QE+deficits is money-financed fiscal programs.
John Cochrane just wrote a bunch of posts that Japan had the perfect monetary policy for decades.
If you are not confused, then maybe you do not understand the situation.
Hi. Congrats on the new forum. I don't know if you follow your sibling substack "The East is Read", but it has some informative recent articles that seem on point to this subject:
(1) Xu Gao's case for stimulus -- Chief Economist of Bank of China International tears apart the opposition (parts 1 & 2)
(2) Ting Lu advises against common "cash handouts" proposal for China's economic slump.
FYI. ... "May a million readers bloom" for you here.
Thanks for the tip.
Xi Jinping is a textbook Communist stuck in 1960s era nostalgia for Mao and the Cultural Revolution. He’s obsessed with the Chinese equivalent of DEI policies, such as rural poverty alleviation and unprofitable BRI projects, rather than providing avenues for the smart and talented to grow the economy. Loose or tight monetary policy won’t make much difference.
I agree that a change in monetary policy won't solve China's biggest problems. But the comparison to DEI is a stretch.
Pettis says China is over-investing, you say the current account surplus is due to over-saving…
I believe he is saying they are over-investing, and also over-saving by an even wider margin. But I'm not certain.
To be simultaneously saving and investing too much is incoherent and points to issues with “too much.” Too much for Pettis may be just right for Chinese people.
I don't know if Pettis is correct, but there's nothing incoherent about the claim. Let's say China now saves 45% of GDP and invests 40% of GDP. Suppose Pettis wants both figures to fall to 30% of GDP. What's "incoherent" about that recommendation?
You second sentence is true, but keep in mind that these decisions are not just made by the "Chinese people", the government also plays a big role.
Why would China import US monetary policy when they have capital flow is restricted? The trilemma says a country can have 2 of 3 (free capital flow, free monetary policy, fixed FX). Since China restricts capital flow, shouldn't they be able to have both fixed FX and a free monetary policy?
They still need to worry about the trade channel, which puts deflationary pressure on China.
Capital restrictions give them some leeway, but not too much.
Good analysis--large parts over my head--but the consistently bad monetary policy of China seems perfectly consistent with Xi's indifference to reality and his tendency to create a cult of advisors who cannot tell him that a different approach should be considered (The recent issue of The Economist had several articles on this). Could part of the problem be that he has thoroughly bought into the conventional fallacy that any type of loose money is a sign of undisciplined profligacy that begets moral hazard and leads to Zimbabwe/Weimar levels of decadence?
I appreciated Kirchner's comments on the irony of how Xi's professions of China's independence are at odds with their strong links to U.S. Fed policy. If they wanted to truly decouple they wouldn't be like Japan, they'd be like North Korea.
I think it's mostly worry about the exchange rate. But for fiscal policy I'd agree with your suggestion about Xi's worry over profligacy.
Scott,
If, as you write (agree), china‘s natural rate has decreased, then this means that the ccp‘s growth target is unrealistic/too high. Should not, in this case, a lower NGDP target be assumed? Dont forget that the revised 4 percent target is still high by historical standards... if true, this could mean that the observed deflation is of the good sort..what do you think
The problem isn't so much the 4% rate, it's the sharp deceleration. In the long run, 4% is fine.
"People view monetary policy as being in some sense about interest rates and the credit markets, whereas in fact it is all about the supply and demand for base money and the growth rate of nominal GDP."
It is neither. Those are possible policy instruments. The "policy" is about affecting some outcome like inflation or NGDP. The Chinese central bank is in the best position ot know whihc instruments to use to achieve what it wishes to achieve.
It would seem that a country with year over year CA surplus and a controlled exchange rate could easily create inflation.
Another thought. Has China’s export driven/consumption suppression model become too entrenched and gone to far? So far that domestic AD is now suppressed into a deflationary spiral?
Those are separate issues. The deflation problem is unrelated to the export driven model. Indeed a weaker yuan (nominal) would help to boost the price level.
Is this an example of the “monetary trilemma”? Has China’s commitment to a controlled exchange rate reduced its ability to focus monetary policy on domestic economic needs?
Yes.
Is it correct to presume, that current combo of 4% NGDP growth + 5% real growth + 1% deflation is detrimental only to the extent that contracts were signed in anticipation of higher NGDP growth rate?
In that case I guess it's mainly debt contracts, because it's doubtful that there's a money illusion-type discontinuity at 4% wage growth for Chinese employees.
What kind of adverse effects, aside from bank failures, can current NGDP growth rate have for China?
Yes, it's due to contracts, but I'd include labor contracts as a problem. Wage stickiness increases unemployment and reduces output.
Yes, but wage stickiness cause unemployment when nominal wages start falling, not when they grow slower then before, as far as I understand?
What if NGDP slowdown is deliberate, if not explicit PBoC policy? They know that they real growth is slowing, so previous double-digit rates of NGDP growth are not sustainable.
I understand, that if this deliberate slowdown is unannounced, it loses 90% of its effectiveness. But, still, they must make monetary policy tighter one way or another, and may be their inability to do forward guidance on future path of NGDP growth is their political constraint, so they're doing it "secretly"
BTW this reminds me of situation in Russia in 2010-2016, when Russian NGDP growth slowed down from around 20% to 4-5%. There were several high-profile bank failures, but unemployment situation was ok
In 1982, a slowdown in nominal wage growth in the US was associated with high unemployment, so it doesn't have to be an outright decline if high wage growth had been previously expected.
Related thoughts https://open.substack.com/pub/stephenkirchner/p/china-policymakers-shooting-the-bond
Great post. I added a link at the end of this post.
Ooh, goodie, a new Scott Sumner book to read. (Well, new to me.)
It would be interesting, if the PRC picked up ngpdp level targeting at 4% a year, and would then end up with slight deflation and yet a robust economy.
Btw, I don't think China is over-investing, at least not in general. They still have a long way to go before they are even as rich eg Taiwan (and Taiwan isn't as rich as eg Singapore). And part of that gap is surely explained by a relative lack of capital.
However China might not need more steel making capacity, or whatever else industrial policy is pushing these days.
I'm no expert on the subject, but I think it's mostly malinvestment in the wrong areas. But it wouldn't surprise me if they were also over-investing to some extent.
Yes, they still do need lots more capital in some areas. But for a country with a per capita GDP of only about $13,000 (say $25,000PPP) China already has some very impressive infrastructure. It seems to me that its high speed rail, highways, subways, airports, etc, are at least 70% to 80% complete.
I've read in the Ag press that China doesn't want to devalue in order to keep inflation down. That was a few years ago, though.