STAFF NEWS & ANALYSIS
Shock: Chinese Leaders Contemplating Harsh Austerity Measures?
By Staff News & Analysis - March 15, 2013

Why the Global Economy Is Still Stuck … In the wake of the financial crisis, policies the world round remain focused on the wrong things, especially speculation … The U.S. government has been embroiled in a fight over something called "sequester" for weeks without a solution. The resulting US$ 85 billion cuts in government spending rekindle the risk of double-dip recession. The cuts are 0.5 percent of GDP and less than one-tenth of the United States' fiscal deficit. The big worries over them reflect the fragile state of the American economy after massive stimulus over five years and a dysfunctional U.S. political system. – Caixin

Dominant Social Theme: As we prepare for lower growth, we shall have to be severe.

Free-Market Analysis: Is harsh austerity in China's future?

Like Greece and Spain (and eventually the US), will China be subject to an austerity binge?

Caixin is a flagship Chinese media group and thus its pronouncements are of interest. It is likely representing the views of Chinese leadership, or at least exploring those views.

What does Caixin tell us in this short but important article (excerpted above)?

It lambasts the current response of the West to the Great Recession, explaining that Western central bankers are confusing monetary stimulation with real and lasting growth.

The article seems to indicate that higher taxes and cost cutting are a realistic way of repositioning an economy. Of course, this is the International Monetary Fund's approach.

This could be very important.

Are Chinese leaders contemplating an Asian form of "austerity" as a way out of the no-growth and high price-inflation era that has crept up on all industrialized nations?

Maybe we are reading too much into this. See for yourself:

India just presented a budget that disappointed a market hoping for major reforms. While the budget promises some reduction of the deficit on good growth outlook, it does not really show any teeth in reining in the country's long fiscal challenge due to extensive government subsidies and weak tax collection efforts. The big and persistent government deficit, close to one-tenth of GDP, causes inflation and crowds out investment. It does not appear that India is working to create its own growth dynamic in a weak global economy.

China is still struggling with controlling property speculation after attempting it for five years, even though the government has complete control over tax and lending policies. It is a symbol of political failure. When an obvious wound to the economy is left to festering for so long, it is difficult to imagine the country will be able to tackle other tougher issues, like reforming the government and state-owned enterprises, increasing transparency, and establishing the rule of law.

The leadership failures around the world reflect that the world has changed, but the kind people who lead remain the same, even though the faces may change from time to time. The existing generation of leaders thinks in terms of rising tides lifting all the boats and burying problems underneath. Their instinctive reaction to economic difficulties is to stimulate growth.

The article tells us approvingly of how governments need to respond to "fiscal challenge[s]." It also makes a very important point at the very end (not quoted above), stating that "the current global growth rate, around 2 percent, is likely to remain the norm for years to come."

This is startling! The ChiComs are said to be determined to continue to grow at 10 percent (or more) a year. Of course, this growth rate has been suspect for years and led to millions of empty apartments and whole empty cities.

The reality of central bank/central planning – as explained by this article – is that it doesn't work. In fact, it creates great booms and busts. And once a bust has taken hold, all that central bankers really can do is raise taxes and slow the funding offered by government.

In other words, citizens pay the price for government profligacy. This is an especially important point when it comes to China. As we have pointed out many times before, whether Chinese citizens that have tasted prosperity will accommodate a new regime and different (austere) policices is obviously a bet that Chinese leaders may believe they must take.

After Thoughts

For investors and others who will feel an impact from Asian austerity, if indeed that is what Chinese officials are contemplating, such a gamble will be a high-stakes one indeed. We can certainly speculate based on this article that a conversation about the possibility is not far off.

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