1/8 Reuters: "China's top leaders have pledged to support an economy that is facing various risks, by managing what is viewed as disorderly competition and beefing up capacity cuts in key industries in the second half of the year."

2/8 Like the promise to boost consumption, the promise to cut capacity in industries suffering from overcapacity is based on a failure to understand the causes of the problem. Neither weak domestic consumption nor excess capacity is caused by administrative oversight.

3/8 Each is the structural consequence of a growth model in which excessively high GDP growth targets must be met, with the main driver of this growth being transfers from the household sector to subsidize investment and manufacturing.

4/8 If Beijing cuts capacity in industries suffering from overcapacity, how can China achieve its GDP growth target except by forcing local governments to create additional excess capacity in infrastructure, or by shifting overcapacity to other manufacturing sectors?

5/8 The proof is in the pudding. As debt pours into various forms of investment, if this investment were economically justified, China's GDP would grow at least as quickly as the growth in the debt used to fund investment.

6/8 The fact that the debt is growing so much more quickly suggests that Beijing's solution to overinvestment in one sector of the economy has always been to shift the direction of lending in ways that create overinvestment in another sector of the economy.

7/8 The point is that it will only be when the bulk of credit creation is directed to boosting consumption, or when Beijing is willing to tolerate much more sustainable GDP growth rates, that low consumption or excess price competition will begin to be resolved.

8/8 The irony is that "vicious" price declines have probably been the most effective way of boosting the household (and consumption) share of GDP, at the expense of businesses and, eventually, local governments, in which case "resolving" one problem may just make the other worse.