The Claim That China's Economy Has Excess Liquidity Is Absurd!

Author: [Mu Zi]
Source: [Fund Analysis]
Article type: Recommended article
Published: 2008-8-10 16:18:54
Column: Expert Perspectives

Just as this column was the earliest to oppose the Hong Kong Stock Connect and was ultimately proven right that the policy was indeed not feasible at the time, this column was also the earliest to clearly and explicitly oppose — in black and white — the absurd claim that China's economy suffers from excess liquidity, as well as the corresponding measures of excessive macroeconomic regulation. Subsequent economic developments have once again mercilessly proven that all economic measures have their theoretical and practical prerequisites. The so-called liquidity surplus diagnosis — copied wholesale from introductory Western economics textbooks — along with the corresponding excessive regulatory measures, simply does not have the requisite practical or theoretical preconditions within China's existing economic structure. As such, it was destined to be unable to play any effectively useful role, and instead generated numerous complications.

Like a cancer patient whose ultimate cause of death is often not the cancer itself but the many complications — complications that are mostly caused by incorrect medical methods, making it a death by treatment rather than by disease — the logic of economic regulation is the same. Many cases of economic failure have been caused by aimless, mechanically copied regulation that ultimately led to loss of control through complications.

Anyone with the most basic understanding of China's economy knows the most basic fact: China's economy currently has a typical dual-track economic structure, not the pure and pristine so-called Western mature market economy model. This means that the economic regulatory methods we adopt must differ significantly from Western methods. Pure Western medicine definitely won't work especially well here; rather, a combination of Chinese and Western approaches has the best chance of achieving optimal regulatory results.

Under this dual-track economic structure, any purely ideological extremist approach must be firmly rejected. Chinese medicine and Western medicine are both medicine — both are means, both are rafts for crossing the river. Clinging to either side only reveals the low skill and poor caliber of the physician. Among all things in the world, there is nothing that is not medicine — the key is how the physician applies it. Ideally, one would act before illness manifests. But if, for various reasons, the condition has already entered the incipient or manifest stage, how to apply the world's infinite pharmacopeia without discrimination, practically and based on actual conditions — this is the greatest test of the physician's and the regulator's wisdom. Without such wisdom, with nothing to rely on but mechanical copying, that is a disaster more severe than the disease itself — truly a great national misfortune.

However, there is one point more important than all of the above: we must be vigilant against attempts to gradually alter China's dual-track economic structure through every means and in every wrapper. The dual-track economic structure is precisely the core competitive advantage of China's economy — one of the greatest secrets behind China's rapid economic development over the past decades. The argument that the dual-track economy hinders China's development is merely spoken from the standpoint of Western so-called pure market economics. In reality, this theoretically pure market economy has never stably existed in either Western history or reality. For an economic laggard as enormous as China, the only feasible and realistic way to catch up with the West is the dual-track economic model. China's immense economic achievements over the past thirty years and its successful resolution of multiple major crises were all accomplished under the practical precondition of the dual-track economic model. The attempt to mechanically transplant the pure Western market economy model onto China is even more insidious and harmful than the aforementioned misguided regulation.

Our most urgent task now is to continue upholding and perfecting this Chinese-style dual-track economic model. The principle of perfection ultimately boils down to just one thing: both tracks must be made strong, not just one at the expense of the other. Otherwise, it completely violates the essence of the dual-track economy. The success of a dual-track economy requires simultaneously strong dual tracks — only this constitutes a true dual-track economy. The greatest risk to China's economy is actually the replacement of the genuine dual-track economy by a pseudo dual-track economy. What is a pseudo dual-track economy? It is one track developing in a distorted manner while the other is effectively suppressed — dual-track on the surface but single-core in actual operation.

A true dual-track economy must necessarily be dual-core in operation. The most malicious complication caused by reckless regulation is the thorough destruction of the mechanism for effective dual-core operation. Currently, China's economy faces precisely this risk of single-core operation. The ultimate outcome of single-core operation is inevitably zero-core operation. An economy with no core is destined to collapse systemically. Once this happens, even if the system can be reinstalled, it would be too late.

Below, continuing on the subject of the index and broad market movement: previously, this column clearly pointed out that the rebound starting from the 3000 level most likely would not reach the magnitude of the total rebound from 6124, and would instead remain at a level similar to the rally from 4778 to 5522. The subsequent actual movement has precisely confirmed this point.

Now, the technical pattern clearly shows that once the decline from 3778 completes its formation, there is a very high probability of entering a major rebound against the 6124 decline — meaning this rebound will be larger in magnitude than any rebound over the past six-plus months, representing the total corrective process against the decline from 6124.

Since the decline from 3778 has already entered its completion phase in the technical pattern, for larger funds, we have now entered the active buy-and-hold-through-losses stage. Selectively entering stocks that have experienced massive declines — say 70-80% — but whose fundamentals still look good in the medium-to-long term, in staged batches, is already a very realistic choice. For those deeply trapped, leaving now is utterly pointless. Patiently waiting for the major rebound and then choosing a better exit timing — this is the more rational choice.