Bloomberg is reporting this week that the U.S. and China are pursuing very different economic policies in the aftermath of the coronavirus recession — a role reversal since the last time the world economy recovered from a shock.
One of the takeaways from the annual National People's Congress under way in Beijing now is a conservative growth goal, with a tighter fiscal-deficit target and restrained monetary settings, Bloomberg says. It notes the contrast with Washington and with the president's second major fiscal package now reaching final approval.
This widening policy divergence is putting strains on exchange rates and could potentially reshape global capital flows. It stems, in part, from different policy lessons from the 2007-09 crisis.
A stunted and choppy U.S. recovery in the 2007-09 period left key Democrats concluding it's vital to “go big” on stimulus and keep it flowing, Bloomberg said. For monetary policy the moral was: “Don't hold back” and “don't stop until the job is done,” Federal Reserve Chair Jerome Powell said last week.
China's leaders have a different take and different history. A massive unleashing of credit growth back then led to unused infrastructure, ghost towns, excess industrial capacity and an overhang of debt. While rapid containment of the pandemic meant the economy didn't need as much help in 2020, President Xi Jinping and his team are now winding things back to re-focus on longer-term initiatives to strengthen the technology sector and tamp down debt risks.
This puts the world's two biggest economies on very different fiscal recovery paths.
“Each learned a lesson from the previous episode,” said Nathan Sheets, head of global economic research at PGIM Fixed Income and a former U.S. Treasury undersecretary for international affairs. The policy mix now makes “a compelling case for renminbi appreciation,” he said.
That's a view that's widely shared, Bloomberg thinks and it notes that the median forecast based on a recent survey is for a strengthening to 6.35 by the renminbi against the dollar by the end of the year, from 6.5114 in Shanghai late Tuesday.
One of China's financial regulators, Guo Shuqing, highlighted in a briefing just days before the opening of the its legislative gathering that high leverage within the financial system must continue to be addressed. Guo pointed to worries about inflated property prices and the risk of overseas money pouring in to take advantage of the premiums China's assets offer. He also indicated the nation's lending rates will likely go up this year.
Bloomberg said its economists believe that China is “increasingly shifting its attention from pandemic recovery to managing the economy in more normal conditions.”
“Unlike many of its peers, including the Fed, China's central bank has continued to calibrate its policy partially with a view to prevent an excessive rise in asset prices,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong.
In three appearances in the past fortnight, Fed chair Jerome Powell has made clear that the Fed plans to keep policy rates near zero until well into the economic recovery, when most jobless Americans are brought back into employment.
As China contends with capital inflows, the U.S. is likely to be pumping out a greater supply of dollars into the global economy — via a widening current-account deficit — as its growth revs up, supercharged by the coming stimulus and the Fed's easy stance.
The U.S. approach is very different with its “outsized” coronavirus relief bill and a planned longer-term follow-up, said Robin Brooks, chief economist at the Institute of International Finance. As growth soars past 6% this year, a wider current-account deficit will be “the pressure valve” given domestic production constraints, he said.
Brooks projects that deficit will hit 4% of gross domestic product this year — the highest since large shortfalls during the 2002-08 period.
China's reluctance toward the kind of “go big” message of Treasury Secretary Janet Yellen dates back several years. After unleashing a fiscal package of 4 trillion yuan ($586 billion, at the time) and an unprecedented surge in broader credit after the 2008 crisis, Beijing was already by 2012 saying it wouldn't do that again.
This reticence later turned into a concerted push to rein in leverage. A May 2016 front-page treatise in the People's Daily blasted excessive debt as the “original sin” sowing risks across financial and real-estate markets. The anonymous article — widely said to have been written by Vice Premier Liu He, Xi's top economic adviser — called stimulating the economy through easy monetary policy a “fantasy.”
So with the country's success in applying draconian restrictions to contain the coronavirus, it should come as little surprise that Beijing is returning toward its pre-pandemic focus on building domestic tech capabilities and managing down debt risks.
By contrast, “the U.S. locomotive is back on track,” said Catherine Mann, global chief economist at Citigroup Inc.
So, we will see. The very large fiscal interventions likely will make the U.S. economy fairly difficult to manage and at least somewhat more vulnerable to shocks — developments producers should watch closely as they emerge, Washington Insider believes.