The US banking system already has this system essentially in built out in place. Every bank has bank regulators who meticulously go through loan files to make sure all the boxes are checked and paperwork in place for the loans. Ostensibly they are scoring the loans and making the banks reserve more or less capital depending on the risky rating but in reality they are along for the ride of where the bank chooses to spend its capital. When a sector crashes the regulators begin to score all the loans in that sector in a way that makes sector specific loans unprofitable and force banks to move their loans to other sectors. Broadly, the two sectors are real estate (or asset) backed loans and commercial and industrial loans (business). I would imagine the Chinese copied this part of the regulatory system and built a monetary policy around it rather than a regulatory apparatus
That is an incredibly clever perspective, but I have to say: they only look superficially similar, but are fundamentally distinct in nature.
You are describing a regulatory apparatus where the government acts as a strict "traffic cop," using risk-scoring to nudge where private capital flows. But American private banks still retain the freedom to manage their own risk and say "no" to protect their bottom line. In China, that freedom practically doesn't exist.
To give you some hard context, China’s state-owned banks directly control over 50% of the country’s total banking assets. But the real difference isn't just market share; it's the chain of command. Or let's think of it this way: In China, the Fed and the Treasury are absolutely part of the same immediate family. When a crisis hits, the two appointed heads of these departments are called into a closed-door meeting together by Xi, united under a single, unyielding political goal. Bank presidents know their careers—and their freedom—depend on obeying the Party line, not on balancing risk. If they are told to flood manufacturing with loans to mask a property crash, they do it instantly, regardless of profitability.
This isn't subtle regulatory nudging but absolute command-driven state mobilization. That’s why Noah’s saying of a unique "financial policy" hits closer to the truth.
Interesting essay, thanks. Is this in many ways the challenge faced by Japan 30 or so years ago? Similar themes of keeping zombie companies alive. With the additional problem of unalleviated rural poverty—due to the lack of job growth in the richer cities. And the problem,we seem to have in the US as well, of educated youth, some with requisite skills some without, very disappointed with their job prospects.
Noah, your essay leaves me thinking that growing its consumer economy is the way out of this conundrum. Are status symbols and shiny objects the key to a strong economy?
It is an interesting idea that macroeconomics in China has a new tool for managing the economy. But we need to remember that it is a double-edged sword - think of the shrinking profits in the Chinese EV industry. This is caused by a government reluctance to curb subsidies to many companies, mainly because of a fear of unemployment. Arguably the collapse in real estate values in the past is a product of the same approach - policy instruments all have their disadvantages as well as advantages.
"monetary policy (e.g. cutting interest rates) [...] Macroeconomists disagree about why ... By making it easier for businesses to borrow and invest, low interest rates stimulate business activity."
I appreciate the "macroeconomists disagree" note.
Monetary policy is not cutting interest rates. Monetary policy is adjusting the quantity of base money. Changes in interest rates are an EFFECT of monetary policy. Not a cause. The rates that are targeted (like the Federal Funds Rate) are free market rates. Free market prices only balance supply and demand; they cannot "cause" anything.
When the central bank increases the money supply, then indeed interest rates lower (in the short term). But they lower because of ordinary supply and demand reasons. You have causality backwards. It is the change in economic conditions that causes the interest rates to lower. It is not the lower interest rates that changes the economic activity.
Friedman, 1998: ""Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy. [...] After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die."
In the middle of the post, you'll find this standalone paragraph with a very clear statement: "Monetary policy does not work via changes in interest rates affecting lending, rather it works by altering the supply and demand for base money to influence nominal GDP."
I can accept that you may not (yet) believe it. But you should be careful not to dismiss it out of hand without giving it considerable thought.
From what I know of China’s government, I am skeptical of all of its official numbers. Chinese leadership has a tendency to shoot the messenger who provides bad news.
Even without a top down plan to cook the books, the numbers will be fudged.
Interesting but must disagree on your conclusion. China’s government does have direct control over lending by banks. The government has partial ownership, board seats I guess, and essentially complete control. Bank managers know they are gone if they do not toe the party line. This method of economic management cannot work in a liberal democracy.
This stimulus strategy might work for Europe. Not sure about America, though, since its businesses often prefer issuing debt/equity on public markets rather than borrowing from banks.
Hmm the factual layout is highly accurate—the command-driven financial policy, the NBS data-smoothing to engineer a "recession-proof" myth, and the grim reality of the current job market.
However, from a historical perspective, none of this is new. China has been relying on this exact same monetary and fiscal toolbox for decades. The discrepancy between official data and micro-reality is an open secret and the punchline of endless jokes. Even the crisis of youth and migrant unemployment has been a structural bottleneck for a very long time; it hasn't suddenly broken just now. To borrow a phrase: There is nothing new under the sun.
If you flip through China's economic history, you’ll see that the country deliberately popped its own real estate bubbles several times in the 1990s, followed by a massive, painful clean-up of non-performing bank loans. The heavy-handed tools being deployed today are deeply rooted in that era. In fact, almost all of China’s modern macroeconomic tools can be traced back to one man: Zhu Rongji. He was a premier who, during the chaos of Mao’s Cultural Revolution, secretly self-studied Keynesian economics, eventually becoming a PhD advisor in economics before taking the wheel of the state. At his core, Zhu was a devout disciple of John Maynard Keynes—he simply elevated Keynesian interventionism to a master-class, authoritarian level.
What can we learn from that 1990s history? Granted, China’s economic scale back then was far smaller, and the ultimate game-changer that eventually saved the day was joining the WTO in 2001. But it’s worth noting that while I haven’t seen any rigorous academic research comparing the psychological and systemic pain of the two eras, my intuitive sense is that the crushing weight of the current debt crisis isn't necessarily worse than what the nation survived back then. So, how does China plan to escape the trap this time without a 2001-style WTO miracle? The playbook remains the same: In China, the state’s ability to forcefully transfer and socialize bad debt across the system is jaw-droppingly efficient and met with virtually zero political resistance. Today, the Party is betting the house on flooding high-tech manufacturing—specifically electric vehicles and renewable energy—with cheap credit. The goal is to seize an absolute global market share, harvest super-returns from international trade, and use that massive wealth influx to dilute and inflate away the domestic real estate debt over the next 5 to 10 years. If history is any guide, it probably won't even take a full decade.
It is an astonishing, high-stakes feat of financial engineering that liberal democracies can only watch from the sidelines, analyze, and criticize—but can never replicate. Ohh to be absolutely clear, I am not suggesting that China's current crisis is minor or negligible. Quite the contrary—the country is in real big trouble. The real estate collapse and the local government debt defaults are simply two symptoms of the exact same underlying pathology, given how deeply local state revenues relied on unconstrained extraction from the property market. I firmly believe there is a very high probability that China will ultimately slide into a Japan-style stagnation trap—a point I’ve debated elsewhere in Noah's comment sections.
It's so weird to look at China's continually plummeting real estate prices and declare it "stabilized". What on this chart is stable? Baffling. So many other charts of Chinese look like this right now - either bad and flat, or going in the wrong direction. I think reasonable people can disagree on how bad the recession is versus what it "would be", but it's definitely premature to call it over.
My best guess is that these people crowing about China's stabilized real estate prices is that they are fundamentally confused as to what the crisis even is. In Austin Texas, its a YIMBY success story that the cost of rent has come down (although China booster probably don't understand that one either). But in China the crisis was that demand was falling, and you can tell demand is falling from the prices falling while supply is also falling. And if you didn't know that, there is still nothing on this chart that would tell you "the bubble" is deflated, because there are nothing to indicate where the natural price would be. And indeed, if you zoomed out you'd see the trend is to go up all among the Chinese boom, so its not self-consistent with what they'd celebrate in the past. The only way that I can make sense of this is from a perspective that all growth must be irresponsible speculation.
So I think this leftist confusion over what China is even about goes much deeper. The same people who are enthusiasts of degrowth and taming the industrial excesses of capitalism, seem to have no idea that China's stands for the opposite of that. Do they read China's press releases that maybe the state should go something less than full steam ahead, from absurd to immense industrial activity, and think that is signs of ideological commitment to degrowth? From China's time in state capitalism to its Maoist great leap forward, it has stood for massive industrialization, long hours, and environment degradation.
And while we are at it, China is of course a far more unequal place than its capitalist rivals in Taiwan, Japan, South Korea and Singapore.
"Its extensive control of the financial system allows it to turn on a flood of bank loans when the economy looks weak, and restrain credit when the danger has passed"
The US banking system already has this system essentially in built out in place. Every bank has bank regulators who meticulously go through loan files to make sure all the boxes are checked and paperwork in place for the loans. Ostensibly they are scoring the loans and making the banks reserve more or less capital depending on the risky rating but in reality they are along for the ride of where the bank chooses to spend its capital. When a sector crashes the regulators begin to score all the loans in that sector in a way that makes sector specific loans unprofitable and force banks to move their loans to other sectors. Broadly, the two sectors are real estate (or asset) backed loans and commercial and industrial loans (business). I would imagine the Chinese copied this part of the regulatory system and built a monetary policy around it rather than a regulatory apparatus
That is an incredibly clever perspective, but I have to say: they only look superficially similar, but are fundamentally distinct in nature.
You are describing a regulatory apparatus where the government acts as a strict "traffic cop," using risk-scoring to nudge where private capital flows. But American private banks still retain the freedom to manage their own risk and say "no" to protect their bottom line. In China, that freedom practically doesn't exist.
To give you some hard context, China’s state-owned banks directly control over 50% of the country’s total banking assets. But the real difference isn't just market share; it's the chain of command. Or let's think of it this way: In China, the Fed and the Treasury are absolutely part of the same immediate family. When a crisis hits, the two appointed heads of these departments are called into a closed-door meeting together by Xi, united under a single, unyielding political goal. Bank presidents know their careers—and their freedom—depend on obeying the Party line, not on balancing risk. If they are told to flood manufacturing with loans to mask a property crash, they do it instantly, regardless of profitability.
This isn't subtle regulatory nudging but absolute command-driven state mobilization. That’s why Noah’s saying of a unique "financial policy" hits closer to the truth.
Dual talent💪🏻
Wait, you play on the Brewers AND keep an eye on the financial sector?
Interesting essay, thanks. Is this in many ways the challenge faced by Japan 30 or so years ago? Similar themes of keeping zombie companies alive. With the additional problem of unalleviated rural poverty—due to the lack of job growth in the richer cities. And the problem,we seem to have in the US as well, of educated youth, some with requisite skills some without, very disappointed with their job prospects.
Noah, your essay leaves me thinking that growing its consumer economy is the way out of this conundrum. Are status symbols and shiny objects the key to a strong economy?
Honestly, I think China needs unions!
It is an interesting idea that macroeconomics in China has a new tool for managing the economy. But we need to remember that it is a double-edged sword - think of the shrinking profits in the Chinese EV industry. This is caused by a government reluctance to curb subsidies to many companies, mainly because of a fear of unemployment. Arguably the collapse in real estate values in the past is a product of the same approach - policy instruments all have their disadvantages as well as advantages.
"monetary policy (e.g. cutting interest rates) [...] Macroeconomists disagree about why ... By making it easier for businesses to borrow and invest, low interest rates stimulate business activity."
I appreciate the "macroeconomists disagree" note.
Monetary policy is not cutting interest rates. Monetary policy is adjusting the quantity of base money. Changes in interest rates are an EFFECT of monetary policy. Not a cause. The rates that are targeted (like the Federal Funds Rate) are free market rates. Free market prices only balance supply and demand; they cannot "cause" anything.
When the central bank increases the money supply, then indeed interest rates lower (in the short term). But they lower because of ordinary supply and demand reasons. You have causality backwards. It is the change in economic conditions that causes the interest rates to lower. It is not the lower interest rates that changes the economic activity.
Friedman, 1998: ""Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy. [...] After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die."
This is certainly one school of thought!
Well ... lest you think it's just me (and you don't buy the Milton Friedman quote), allow me to offer you this, as supporting evidence:
https://scottsumner.substack.com/p/the-empire-strikes-back
In the middle of the post, you'll find this standalone paragraph with a very clear statement: "Monetary policy does not work via changes in interest rates affecting lending, rather it works by altering the supply and demand for base money to influence nominal GDP."
I can accept that you may not (yet) believe it. But you should be careful not to dismiss it out of hand without giving it considerable thought.
From what I know of China’s government, I am skeptical of all of its official numbers. Chinese leadership has a tendency to shoot the messenger who provides bad news.
Even without a top down plan to cook the books, the numbers will be fudged.
Interesting but must disagree on your conclusion. China’s government does have direct control over lending by banks. The government has partial ownership, board seats I guess, and essentially complete control. Bank managers know they are gone if they do not toe the party line. This method of economic management cannot work in a liberal democracy.
This stimulus strategy might work for Europe. Not sure about America, though, since its businesses often prefer issuing debt/equity on public markets rather than borrowing from banks.
Very interesting, I had assumed this smoothing only leaned in the positive direction. Do ou have any reading on this you can recommend?
Hmm the factual layout is highly accurate—the command-driven financial policy, the NBS data-smoothing to engineer a "recession-proof" myth, and the grim reality of the current job market.
However, from a historical perspective, none of this is new. China has been relying on this exact same monetary and fiscal toolbox for decades. The discrepancy between official data and micro-reality is an open secret and the punchline of endless jokes. Even the crisis of youth and migrant unemployment has been a structural bottleneck for a very long time; it hasn't suddenly broken just now. To borrow a phrase: There is nothing new under the sun.
If you flip through China's economic history, you’ll see that the country deliberately popped its own real estate bubbles several times in the 1990s, followed by a massive, painful clean-up of non-performing bank loans. The heavy-handed tools being deployed today are deeply rooted in that era. In fact, almost all of China’s modern macroeconomic tools can be traced back to one man: Zhu Rongji. He was a premier who, during the chaos of Mao’s Cultural Revolution, secretly self-studied Keynesian economics, eventually becoming a PhD advisor in economics before taking the wheel of the state. At his core, Zhu was a devout disciple of John Maynard Keynes—he simply elevated Keynesian interventionism to a master-class, authoritarian level.
What can we learn from that 1990s history? Granted, China’s economic scale back then was far smaller, and the ultimate game-changer that eventually saved the day was joining the WTO in 2001. But it’s worth noting that while I haven’t seen any rigorous academic research comparing the psychological and systemic pain of the two eras, my intuitive sense is that the crushing weight of the current debt crisis isn't necessarily worse than what the nation survived back then. So, how does China plan to escape the trap this time without a 2001-style WTO miracle? The playbook remains the same: In China, the state’s ability to forcefully transfer and socialize bad debt across the system is jaw-droppingly efficient and met with virtually zero political resistance. Today, the Party is betting the house on flooding high-tech manufacturing—specifically electric vehicles and renewable energy—with cheap credit. The goal is to seize an absolute global market share, harvest super-returns from international trade, and use that massive wealth influx to dilute and inflate away the domestic real estate debt over the next 5 to 10 years. If history is any guide, it probably won't even take a full decade.
It is an astonishing, high-stakes feat of financial engineering that liberal democracies can only watch from the sidelines, analyze, and criticize—but can never replicate. Ohh to be absolutely clear, I am not suggesting that China's current crisis is minor or negligible. Quite the contrary—the country is in real big trouble. The real estate collapse and the local government debt defaults are simply two symptoms of the exact same underlying pathology, given how deeply local state revenues relied on unconstrained extraction from the property market. I firmly believe there is a very high probability that China will ultimately slide into a Japan-style stagnation trap—a point I’ve debated elsewhere in Noah's comment sections.
It's so weird to look at China's continually plummeting real estate prices and declare it "stabilized". What on this chart is stable? Baffling. So many other charts of Chinese look like this right now - either bad and flat, or going in the wrong direction. I think reasonable people can disagree on how bad the recession is versus what it "would be", but it's definitely premature to call it over.
My best guess is that these people crowing about China's stabilized real estate prices is that they are fundamentally confused as to what the crisis even is. In Austin Texas, its a YIMBY success story that the cost of rent has come down (although China booster probably don't understand that one either). But in China the crisis was that demand was falling, and you can tell demand is falling from the prices falling while supply is also falling. And if you didn't know that, there is still nothing on this chart that would tell you "the bubble" is deflated, because there are nothing to indicate where the natural price would be. And indeed, if you zoomed out you'd see the trend is to go up all among the Chinese boom, so its not self-consistent with what they'd celebrate in the past. The only way that I can make sense of this is from a perspective that all growth must be irresponsible speculation.
So I think this leftist confusion over what China is even about goes much deeper. The same people who are enthusiasts of degrowth and taming the industrial excesses of capitalism, seem to have no idea that China's stands for the opposite of that. Do they read China's press releases that maybe the state should go something less than full steam ahead, from absurd to immense industrial activity, and think that is signs of ideological commitment to degrowth? From China's time in state capitalism to its Maoist great leap forward, it has stood for massive industrialization, long hours, and environment degradation.
And while we are at it, China is of course a far more unequal place than its capitalist rivals in Taiwan, Japan, South Korea and Singapore.
"Its extensive control of the financial system allows it to turn on a flood of bank loans when the economy looks weak, and restrain credit when the danger has passed"
What the Bernanke Fed failed to do. :)