Jean-Bapiste Alphonse Karr’s tome translates to: The more things change, the more they stay the same. We know of no truer description of China than this. For in spite of all the clamor and commotion over China becoming a consumer-driven economy, its central planners continue to center economic policy on exports. China has cut interest rates in an attempt to make the yuan, or renminbi (your choice) more competitive versus the currencies of other export driven economies, most notably the Japanese yen. Chinese officials said the rate cut was to increase consumption and to fight deflation, but….
Investors have been conditioned to expect a transformation of China’s economy from an export-driven economy to a consumer-driven economy which would (should) eventually dwarf the U.S. economy. At least that is the way it looks on paper. If only games were played and battles fought on paper. If this was the case, the Cubs might have won a few World Series since 1908 and the British should have emerged victorious from the Revolutionary War and we would be speaking English today.
The fact (at least for now) is that China is an economy trying to find itself. More accurately, it is economy that its central planners are in the process of crafting. Chinese officials appear to be on a course to allow just enough free-market economics to keep the Chinese economy viable while maintaining substantial control of the country. It wants its cake and too eat it as well. It has been our experience that those who try to have it all, in the end, fall short in every area. If China were to be compared with an aircraft it might be described as a large craft with many powerful engines and a fuselage made of lead. With enough power one can make almost any craft fly, but it will probably disappoint.
If China is to fulfill its potential, it must get the lead out. That probably doesn’t happen until China has free elections. That might happen, some day. Until then, China is likely to rely on exports, creative accounting and the generosity of optimistic investors. When (if) it does become an open economy, there could be a painful transition period. Although investing in China could prove advantageous, Bond Squad prefers to consider economies which are more open and efficient.
By Thomas Byrne
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.