I agree with you. China needs to shrink the state sector and increase the share of the private sector in the economy. Looking at the recent industrial profits, the stated owned enterprises (SOE) profits were down, private business profits were up. I have been encouraged that private capital has been allowed to enter the state controlled sectors. Moving in the right direction imo.
Electricity consumption is a measure of the manufacturing sector. About 80% of the total electricity consumed is used by the manufacturing sector, so if the manufacturing sector slows, overall electricity consumption will fall since its vastly skewed towards manufacturing. Electricity consumption in the service sector and residential sector has increased, although electricty consumed in the agricultural and manufacturing sectors have decreased. So electricity consumption is a poor measure of the overall economy.
Service sector has been cushioning the slowdown in the manufacturing sector. If we had strong domestic consumption, the manufacturing sector would still have the domestic market to sell into, but since the manufacturing sector is heavily reliant on the overseas markets, its been suffering. The service sector is also a big labour absorber, it employs more people per unit of GDP than the manufacturing or construction sectors. Service sector has alot to do with domestic consumption, so the growth in the service sector is a sign that domestic consumption is starting to pick up. The logistics sector is vital because if the logistics costs are too high in transporting, storage and management, then the overall retail prices for goods will be very high and consumers wont be able to afford those goods.
Premier Wen recently announced cutting more red tape in regulations. The regulatory burden must be cut for small and medium enterprises (SME).
Yes I am glad no big stimulus has been announced because the last stimulus caused 3 big problems 1) high inflation 2) property bubble 3) increased local government debt.
Instead of big fiscal expenditures, stimulus can come from removing unecessary regulations, lowering taxes, improving access to capital for SME, etc.
One of the biggest problems for SMEs is the lack of access to capital. Since most of the capital they get is through bank loans, if banks decide they dont want to loan to risky SMEs and instead lend to big SOEs, then the SMEs are starved of capital. Countries like the US have well developed capital markets SMEs can access to get capital and not rely solely on bank loans, but in china, the capital markets are under developed so chinese SMEs dont have the access to the different sources of capital like US SMEs have. But progress has been made in this areas by the introduction of the high yield bonds (junk bonds) for SMEs. But clearly more needs to be done. OTC markets must be developed too.
China is clearly slowing, and will continue to slow further in 3rd quarter and 4th quarter, but to say its crashing is false. If the private sector is allowed to grow and allow the state sector to shrink, then in the long term this will be very healthy for china. State sector uses too much inputs(land, labour and capital) to produce too little output. Private sector is very efficient in using those limited resources and getting higher output as the free market is allowed to function properly and thus allocates those limited resouces to viable businesses.
Inefficient businesses should be allowed to go bankrupt and industries need to consolidate by M&A, all these things will create a very strong economy in the long term.
I am in favour of cutting the RRR but raising the interest rates. Cutting RRR adds more liqudity into the economy which is needed but I want a higher cost of capital (higher interest rates).
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