Why Remove the Wen Jiabao Put?
Benefiting from seeing mistakes of more advanced economies, China’s leadership, in my opinion, is taking pro-active steps to avoid the gross misallocations of capital that result from bubbles in asset prices. By signaling that they will no longer maintain super low rates that enable loose money and encourage the borrow-and-spend mentality required to maintain 8%+ GDP, I believe China’s leadership recognizes that the true growth rate of its economy is lower than 8%. Therefore, artificially spurring growth to higher levels in the short-term only undermines long-term growth potential by wasting capital and resources on low-return activities and projects when it could be allocated to higher return opportunities. In other words, China recognizes the fact that keeping interest rates artificially low does permanent long-term damage to its economy. For more on how keeping rates artificially low harms economies in the long term see my recent article on the subject. As China aims to transition f
