As I have said many times before, I suspect we will see a lot of discontinuity in policymaking this year – amid lots of panicking – and recent events show just how. In the past few months Beijing seems to have become so worried about signs of overheating that, after trying unsuccessfully many times to pare growth carefully, it has given up the scalpel and has brought out the sledgehammer.
Although the history of financial cycles is thousands of years old, it has only been in roughly the past 200 years that we have begun to think of the ups and the subsequent downs as involving the same process, rather than emerging as the consequences of exogenous shocks, like war or famine. In fact I would argue that the process that creates the expansion, especially the credit process, is itself what inexorably causes the contraction.
The contraction, in other words, is often simply the process of resolving the distortions that goosed the boom. As an aside, one of the earliest recorded acknowledgements that credit cycles are endemic to the economy may have been the entry on “Credit” in the 1838 edition of the Encyclopedia Americana: “The history of every industrious and commercial community, under a stable government, will present successive alternate periods of credit and distrust, following each other with a good deal of regularity.”
Will it ever. This is not exactly what the authors meant, of course, but it looks like we are watching China experience its own alternate periods of credit and distrust, with Beijing once again changing the pedal on which it is stomping. Given the bad global environment, China’s huge domestic imbalances, and its out-of-control monetary condition, there are precious few tools Beijing has for fine-tuning growth. Instead policymakers are going to switch back and forth throughout the year between stomping on the accelerator and stomping on the brakes.
For now, it’s the brakes on which they seem to be stomping, and the market is scared. Stocks took a big beating this past week, with the SSE Composite down 6.3% (although the whole year has been pretty bad overall) partly on fears that Beijing is very serious about overheating and may overreact (and Greece didn’t help). Real estate has also been affected. According to one report, after surging in early April, property prices in Beijing dropped a shocking 31% in the past month. I…
