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What China Can Do To Fix Its Economy

And why it probably won’t do these things

The Chinese economy continues to crash. Its stock market and real estate market keep trending down, debt as a percentage of GDP keeps going up, local governments edge closer to bankruptcy, and millions upon millions of its citizens can’t find jobs. Is there anything that it could do to arrest this steep decline before its too late?

There are a few standard ways to quickly jumpstart an economy in the doldrums:

1. Loosen monetary policy (lower interest rates. and quantitative easing).
2. Increase government spending.
3. Reduce the value of its currency to increase exports.

All of these aim to get more money in the pockets of consumers (so that they spend), increase credit growth, invigorate asset prices, and stave off deflation.

China forces its banks to extend and pretend

China’s policy interest rate currently sits at a neither too high nor too low 3.35%. This gives it some room for easing, though it will quickly find itself pressing against the zero-bound. The problem for China is that for lower interest rates to trigger increased credit growth and spending, banks need to be free and unencumbered, able to borrow and…