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Mar 16 • 4 tweets • 1 min read
1/4
 After several terrible days, culminating in a 4.95% drop in the SCI Tuesday, a very worried Beijing demanded that government departments should “actively introduce policies that benefit markets” and otherwise signaled support for the stock markets.
caixinglobal.com/2022-03-16/sha…
2/4
 The response was immediate, with the SCI up 3.48%, and most other indices up even more. This is a strong reminder that the most important driver of financial markets in China continues to be government signaling.
3/4
 While I am sure investors are relieved, its worth pointing out that this doesn't help stock markets allocate capital efficiently. Investors aren't judging the long-term productivity of businesses at all. They are mainly judging the likely extent of government support.
4/4
 In the end this probably doesn't matter much because the banking system is far more important in allocating risk capital than the stock markets, but it does little to improve confidence in China's capital allocation process.

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More from @michaelxpettis

Michael Pettis Profile picture
Mar 16
1/14
Good piece by @TomFStevenson on one of the reasons why, for all the damage it does to the US economy, Washington is unlikely to want to constrain the global use of the US dollar.
lrb.co.uk/the-paper/v44/…
2/14
“The fact is," he notes, "that Washington controls access to the international financial system. Much as a naval blockade denies access to the seas, US sanctions are based on monopoly power over a global commons: the world’s reserve currency and medium of exchange.”
3/14
But this comes at a cost to the US too. The dollar is widely used not because of US military power but rather in spite of it. Much of the world suffers from growth policies that reward domestic elites at the cost of structurally weak domestic demand and excess savings.
Read 14 tweets
Michael Pettis Profile picture
Mar 16
1/5
 To me what's most impressive about this story is not the story itself, but rather its relatively muted impact. Even a few years ago I suspect this story would have unleashed an orgy of predictions about the imminent demise of the US dollar.
wsj.com/articles/saudi… via @WSJ
2/5
 Today, while there has been some hyperventilating, the reaction is generally much less excited than it would have been. More people seem to understand that the dominance of the dollar has nothing to do with the currency denomination of the price of oil (or anything else).
3/5
 After all, with a smart phone you can denominate any trade in any currency you like. What matters ultimately is how trade surpluses are recycled into assets and which countries will accept the corresponding deficits, and this has nothing to do with currency denomination.
Read 6 tweets
Michael Pettis Profile picture
Mar 15
1/5
 Caixin expects that to reach 2022's aggressive 5.5% GDP growth target, Beijing "will boost infrastructure spending to offset the weakening real estate sector. "Infrastructure investment" it insists, "will remain a crucial growth driver this year."
caixinglobal.com/2022-03-14/ana…
2/5
 This seems already to be happening. In the first two months of the year fixed-asset investment grew much faster than industrial output and retail sales – by 0.66% percent on a month-on-month basis, relative to 0.34% and 0.30% respectively.
3/5
 But citing a recent report by Moody's, the article also claims that "policymakers are aiming to keep the macro-leverage ratio stable and total social financing in line with nominal GDP growth."

The problem is that these are conflicting objectives.
Read 5 tweets
Michael Pettis Profile picture
Mar 12
1/11
Yesterday, in his final NPC press conference, Li Keqiang explained that Beijing was choosing tax rebates to business over consumption support or even more infrastructure spending because it was a more efficient way to deliver growth.
china-embassy.org/eng/zgyw/20220…
2/11
But supply-side measures like tax rebates to businesses would only be ta more efficient way to boost the economy if businesses had major investment needs that they were unable to satisfy because of lack of retained earnings or access to capital.
3/11
They would however be very inefficient in an economy suffering from demand-side constraints.

This doesn't mean businesses wouldn't prefer tax rebates anyway. Tax rebates boost profits directly, whereas spending on infrastructure and consumption does so indirectly.
Read 11 tweets
Michael Pettis Profile picture
Mar 11
1/8
 According to the WSJ, "Shifting more production domestically will inevitably add to the inflation that is already on the rise." I know inflation has become the thing we most like to worry about, but I don't think this claim is true at all.
wsj.com/articles/econo…
2/8
 There is no evidence that a less globalized world is more inflationary than a more globalized one. Trade restrictions on a particular good may raise the price of that good inside the protected market, but it lowers the price of that good outside the protected market.
3/8
 Even inside the protected market, the price increase on that good is a one-off event, not a continuous (inflationary) one, and anyway puts downward pressure on the prices of other goods within the protected market.
Read 8 tweets
Michael Pettis Profile picture
Mar 10
1/9
 Good article, as usual, by Caixin on how regulators hope to expand credit this year. Credit must expand by at least 10% to achieve the growth target, but regulators are trying to limit the amount of credit going to property and infrastructure.
caixinglobal.com/2022-03-09/in-…
2/9
 "Even as the central government seeks to stimulate the economy with more credit," Caixin notes, "it’s still seeking a balance so it doesn’t derail efforts in recent years to slash excess leverage in China’s overheated housing market and debt-ridden local governments."
3/9
 As a result, "banks are focusing on issuing a greater share of their loans to small businesses, as well as agricultural, technology, green and manufacturing companies this year, as advocated by China’s central bank."
Read 10 tweets

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