Chief economist update: A capitalist in communist clothes

As expected, the Reserve Bank of Australia (RBA) did nothing to monetary policy after the conclusion of its second board meeting this year.

It kept the official cash rate at a record low, predicated on the same rationale it put forth at its February 2019 meeting.

The RBA's move is understandable given a cut now would leave it open to accusations it's acquiescing to the dictates of financial markets - especially now expectations for a rate cut (or two) are gaining momentum.

At the same time, it confirms its concern over the slowing Australian economy that, ultimately, could become a self-fulfilling prophecy.

That, or like the BOE's Mark Carney, the RBA is delaying action until the political backdrop becomes clearer. There's Brexit in the UK, while Australia is bracing for the upcoming Federal election.

But there's one truism in RBA Governor Philip Lowe's latest statement: "In China, the authorities have taken further steps to ease financing conditions, partly in response to slower growth in the economy."

For no sooner had the ink dried on the statement, China announced more measures to stem its slowing economy.

My compliments to Factset for this synopsis: "Budget deficit target raised to 2.8% from 2.6% last year with CNY2.0T [US$298 billion] in tax cuts announced, including a 3% cut to top bracket VAT rate.

"Raised local government special bond issuance to CNY2.15T from CNY1.3T last year to aid infrastructure investment. Signaled looser liquidity stance by pointing to further RRR cuts for smaller banks," it said.

Chinese Prime Minister Li Keqiang announced the measures at the opening of the National People's Congress on March 5, simultaneous with his revelation of a lower GDP growth target from 6.5% to 6%-6.5% this year.

China's GDP growth slowed to 6.4% in the December 2018 quarter (down from 6.5% in the third quarter) and 6.6% for the full year 2018 from 6.9% in 2017.

In his words, Li declared: "The environment facing China's development this year is more complicated and more severe ... There will be more risks and challenges that are either predictable or unpredictable and we must be fully prepared for a tough battle."

Thus, fiscal policy will become "more forceful."

That's being proactive to you, Mr. RBA.

To be sure, the writing (of a slowing economy) has been on the wall for China, triggering expectations of continued growth weakness next year (and perhaps, the one after that).

But just as the counter-cyclical policies implemented by most central banks around the world at the time of the GFC, China's latest salvo could do the trick (the currently speculated breakthrough in the US-China trade deal will certainly help).

And what a big surprise that is for a communist/socialist/authoritarian government. China's counter-policy responses smack of adherence to the diktat of capitalist John Maynard Keynes.

China's right in the thick of employing Keynesian Economics - a capitalist/market economy stabilisation policy theory advising increased government spending to shore up domestic demand in times of recession and/or slowing growth.

And if that's not enough, authoritarian China would also persuade (?) financial institutions to lend, consumers to consume, businesses to borrow, etc.

If only the Politburo could do the same thing to Trump.

Read more: RBAReserve Bank of Australia
Link to something lbnstleo