China won’t save the US from recession this time Opinion by WSJ

The Wall Street Journal has published an article by Joseph C. Sternberg arguing that the US should stimulate its own productive supply side instead of leaning harder on China’s wasteful one.

Caliber.Az reprints the article.

Bad news, folks: China’s not going to save us this time.

That, in a nutshell, explains why investors sank into a sour mood this week on the latest bad economic data from China. Survey data exposed a deepening slowdown in manufacturing. Services, while still buoyant, are less so than in previous months. Urban youth unemployment is at a record high, above 20%, with college grads faring particularly poorly.

The all-important property market continues to lag. It all suggests China’s fervently hoped-for post-Covid economic boost is snapping before it had a chance to crackle and pop.

The timing couldn’t be worse, because all indications are that the U.S. is at the beginning of the beginning, rather than the end of the end, of its own contraction occasioned by the painful adjustment to the withdrawal of a decade of extraordinary monetary stimulus. Banks may no longer be facing the deposit runs of March, but fretful murmuring about commercial real-estate credit is not a sign of financial or economic health.

This makes for a less fortuitous stellar alignment than the last time the U.S. suffered a major credit crunch, the 2008 global financial panic and ensuing Great Recession of 2009. As bad as that downturn was, things would have been even worse without an assist from Beijing. As the subprime-mortgage crisis and a financial-regulatory bonanza froze credit in America (followed two years later by a sovereign-debt fiasco in Europe), the Chinese government threw open the financial floodgates with reckless abandon.

Beijing’s stimulus then was just what the U.S. economy needed. Rather than adopting the Keynesian demand-side reflation attempted by Washington via bulked-up transfer payments, Beijing pursued a supply-side stimulus with Chinese characteristics. Officials encouraged an explosion in lending via state-owned banks, shadowy local-government investment funds, and many entities in between. The point was to prop up producers, especially manufacturers.

The principal Chinese characteristic here was a near-total disconnect from economic reality, including such inconvenient questions as who would consume everything China was producing and whether they would continue consuming it long enough for all China’s debtors to remain solvent. This became an era of rampant overproduction. Yet Beijing’s economic unreality mirrored Washington’s, as an American economy pumped up by the government’s deficit spending proved perfectly happy to consume what Chinese manufacturers were subsidized to produce. Hence the ever-larger deficits in the trade in goods with China.

The icing on the cake was how it all was paid for. Because Beijing was unwilling for various reasons to allow Americans’ borrowed cash to flood uncontrolled into the domestic Chinese economy, that foreign cash was sterilized in Beijing’s foreign-exchange reserve—from where it was recycled back into purchases of the Treasury bonds Washington used to fund America’s overconsumption. Beijing’s holdings of U.S. government debt, as measured by the Treasury Department, surged to $1.3 trillion in mid-2011 from $401 billion at the start of 2007.

China is a different place this time around, in some ways for the better and in others much for the worse. In the “better” column, Beijing has wised up to the unsustainability of its post-2008 economic strategy. The risk was never that China’s closed-off financial system would collapse in a Western-style financial crisis. But the distortions the credit boom and its misallocation created have dragged on China’s productivity. State-owned enterprises, overleveraged property developers and local-government boondoggle builders came out ahead. Meantime, productive private enterprise and household savers suffered.

Beijing knows all this. One reason China’s post-Covid recovery is turning out to be a disappointment is that the government is nearly three years into a major clampdown on the real-estate market that in an earlier era was a prime vector of reckless credit expansion. And despite the steep economic costs of Beijing’s zero-Covid policies, no one believes a post-2008-style lending stimulus is imminent. Were Beijing to pivot from export-led, credit-subsidy-dependent growth to domestic consumption fed by an entrepreneurial private sector, the world would be much better off over the longer term—the Chinese people most of all.

Yet as if determined to thwart such a rotation, President Xi Jinping also is tightening the Communist Party’s political control of the economy at the expense of productive private enterprise. This is particularly noticeable in the favoritism Beijing shows state-owned enterprises despite their relatively low productivity; the government’s hostility to the entrepreneurial service companies, especially in tech, that should be the backbone of a modern domestic-facing economy; and the permanent disdain for foreign companies trying to sell goods and services in China.

So no, don’t expect a China bailout if the U.S. is on the cusp of a financial panic or credit crunch of some sort. We’ll have to do it the hard way, by stimulating our own productive supply side instead of leaning harder on China’s wasteful one. Given the current political climate in the West, investors are right to worry this won’t happen any time soon.