The curse of the ‘middle income trap‘, that seemingly benign series of indigenous circumstances that permits a dominant political class to exploit comparative advantage, has ended for Beijing. As of March, the Central Bank of China decided to stop fighting financial markets and permit the value of the yuan to depreciate. In August of 2015, those same administrators believed their dollar-peg was overvalued, so they took the advice of the I.M.F. and permitted a revaluation of the yuan; they sought to make the Chinese dollar more market based, this in accordance with both U.S. Treasury officials and I.M.F., World Bank standards. By liberalizing the world’s second largest economy, Chinese officials sought to damage American standing by assaulting our already broken Bretton-Woods system. All of this was done under the imprimatur of seeking comparative advantage in having the yuan included in the basket of currencies that are the world’s reserve currencies.
It hasn’t gone well for Beijing since then.
As of January 04, 2016, Chinese Central Bank authorities dropped the market-based mechanism, the yuan is now back under tight government control. Funny thing how the socialist Keynesian gnomes at the I.M.F. and World Bank never reneged on their end! Nevertheless, Beijing has sought a recovery through strict Keynesian means, by resorting to debt fueled instruments. They’re spending to prop-up the countries finances, but debt fueled expansion isn’t growth, just ask anyone in a first world country.
A brief look at China’s national portfolio reveals that “old economy” stocks like state owned enterprises of cement and steel have sharply risen while previously trendy sectors like retail and technology have fallen. What has disappeared is heavy capital investment like property with high consumer spending by nouveau riche.
Get ready for the Chinese debt bomb!