China growth more than a liquidity problem

 

The forecasts for China growth have fallen significantly in the last three months and are now below the target level set by the government. The PBOC has responded with rate cuts, but there is now the growing view that this is not a liquidity problem but a structural problem. As said by Michael Pettis, "As Keynes explained over 90 years ago, liquidity is a constraint on investment, not a cause." 

You can make funds available at attractive rates but if there are no good projects or no optimism about the future, there will be no new borrowing. The borrowing should not be by the government, but by firms that believe there is a reason to expand. This expansion has to be domestic and not based on more trade. The constraint is not liquidity but animal spirits, the optimism that there is a reason to invest,