Has the Keynesian intellectual been able to re-assert himself with China’s economy once again on the brink of breaking down? Li Keqiang is nominally the Communist number two, but had seen his role curtailed after a 2015-2016 struggle with Xi Jinping. The issue was debt versus growth.

As a trained Economist, Li was responsible for the government’s early 2016 stimulus panic, which seems to have gone against Xi’s view of post-growth China. No more empty debt-binges; no more trying to grow a tree in the air. As I wrote last year in more detail about this rivalry:

In a lot of ways, that’s just what China’s 2016 stimulus panic allowed him to achieve. As the May 2016 article in the People’s Daily said, Xi’s side wasn’t at all convinced it would be effective. In a lot of ways, it sounded like a prediction intended to be date-stamped and referred to again for a future “I told you it wouldn’t work.”

It didn’t; the 2016 move ended up failing, as usual, with only a minor bump - which began to fade almost as soon as 2017 began (below). While Economists in the West were firing up the their actual printing presses, their bumper sticker-makers printing the slogan “globally synchronized growth” left and right, counting on an outsized Chinese contribution for it, Xi was increasingly sidelining Li for the lack of results.

By October 2017, the 19th Party Congress, the argument had already been settled. And while the eurodollar system received the message loud and clear, the Western media - because of its corrupt central bankers - failed to heed the warning. Euro$ #4 showed right where the inflationary breakout was supposed to be; where these latter were forecasting, as if globally synchronized growth had been real.

Chinese “stimulus” failed everyone.

Li, though, seems to have made something of a comeback, and that he has is significant. COVID-19 and the dire economic situation may have made his return inevitable, even though all signs point to a short leash (with Xi still gripping it tightly).

The Communists have just held their annual rubber-stamping convention, the so-called People’s Congress, in which Premiere Li announced there would be no GDP target this year for the first time in modern China. In its place is a somewhat restrained “stimulus” plan (by comparison to everywhere else), which appears to be something of a compromise between the two factions.

About RMB 3.6 to 4.0 trillion was promised, split up between various priorities (from tax cuts to local government aid, not just raw State-owned FAI), a lot of which to be financed by additional central government borrowing and approval on local levels. In a likely nod to Xi, Li warned the Congress, “governments at all levels must truly tighten their belt.”

The goal of all this debt is “stabilizing employment and ensuring living standards” rather than blanket waste as in the past, with the Premiere describing instead what looked like an employment target of at least 9 million new jobs. GDP will be whatever it is, but he wants the Chinese public to rest assured. Wonder why?

Altogether, this plan seems to indicate a high degree of caution on the part of Chinese authorities. Not quite “V” underlying its reasoning. As Li also said:

"This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the COVID-19 pandemic and the world economic and trade environment."

Hope for the best, but plan otherwise. And, notice, it’s not just the coronavirus being blamed, but also the ubiquitous return of both “trade wars” and uncertain “global growth.” That last one being the real story of the last three years.

For several months now, ever since the end of March’s dollar bottleneck ended the first part of GFC2, the operating theory has been that once the virus and related shutdowns had faded, the global economy would go right back to work and businesses would be suffering little intermediate and no long-term demand destruction as a result.

The “V” of V’s.

To that end, more and more data does show that April was likely the bottom. But, having reached that bottom and moved through it to the other side, this doesn’t necessarily mean what everyone had hoped. The storm hit and then moved on, so only now is it time to start assessing the damage.

The second and third order effects, in other words.

If Xi has let Li come out of hiding, it would seem Li has talked Xi into the possibilities (if there’s one thing Keynesians spend most of their time on, it’s worrying especially about second order effects).

Elsewhere around the world, speaking of “global growth” prospects, it’s nearly uniform. April’s the bottom, but now what?

Yesterday, IHS Markit released its flash PMI estimates for economies all over the world, which, as expected, were better than they were during April. But, again, rebounding from record lows does not equal improving. It’s still bad, just not as bad as fast as before.

Markit’s US composite index jumped from 27.0 to 36.4, while Europe’s up from 13.6 to 30.5. Those numbers seem impressive, but were actually still what had previously (before April) been record lows.

Beginning with the American figures:

"Reflecting the further severe drop in new business, firms cut workforce numbers at a marked pace in May. The rate of job losses eased from April, but was nonetheless the second-fastest in the 11-year survey history. Manufacturers and service providers recorded similar rates of decline as a lack of new work led to increased reports of lay-offs and lower working hours. Subsequently, spare capacity rose and backlogs of work continued to fall."

And:

"Jobs consequently continued to be cut at a rate unprecedented prior to the COVID-19 lockdowns, the rate of staff cuts easing only modestly compared to April’s record. Similar rates of job shedding were seen in services and manufacturing, as firms in both sectors sought to cut capacity in line with weaker demand."

Notice the persistent theme for both. Furthermore, the US survey noted a continued dour outlook for the next year, where some “noted it would take a long time for conditions to normalize.”

If that does end up being the situation, then, coupled with spare capacity still not quite matched up to weakened demand, the world ends up with another round of contraction. It needn’t be anywhere close to March-April levels, either, since any interruption of the “V” would spell big trouble all across the economy and markets.

That’s now what should be coming into focus – the second wave. Not of the pandemic, though that may happen, but of the next leg in the global economy. With missed payments and looming bankruptcies, there’s a lot potentially contained in that next leg.

This seems to be why Xi allowed Li out of hiding (only a slight exaggeration) at practically the same time Jay Powell debuted.