Does anybody know what China’s doing? Because I don’t know what China’s doing. And I don’t think China knows what China’s doing either. Maybe Xi Jinping knows. But I’m not sure that’s very comforting.

Chinese banks on Friday left both key benchmark lending rates unchanged, in line with a steady seven-day reverse repo rate.

Wait, let me back up because I’m sure half of you are already lost.

Five years ago, China embarked on an effort to simplify the country’s multi-tiered rate system. Long story short, the result was a regime wherein banks set two key rates — a one-year lending rate and a five-year, mortgage-linked tenor — guided by the rate on the PBoC’s medium-term lending facility. Every month, the PBoC would publish the one-year MLF rate and then, on the 20th, banks would generally — but not always — adjust their own one-year benchmark lending rates accordingly, and sometimes the five-year rate too.

A few months back, the PBoC decided to sideline — or backburner or demote or whatever action verb you want to use — the one-year MLF rate in favor of the rate on one-week repos, at least for the purposes of signaling markets. There’s still some confusion and ambiguity around that shift, but the idea is to use the seven-day reverse repo rate as the de facto policy rate. Or something. That’s the gist of it. And that rate — the seven-day reverse repo rate — has been unchanged since a July cut.

That brings us to Friday, when the two bank lending rates mentioned above fixed unchanged, consistent with most forecasts. My chart header (below) is derisive and maybe it’s even a bit disingenuous. The yuan’s soft-pegged to the dollar, not hard-pegged, so maybe China wanted to avoid the perception that it was lowering its key rates “just because” the Fed cut rates. Further, speculation was rampant that officials are prepping something “big” — that unchanged benchmark rates are actually a sign that the Party’s cooking up a major stimulus package and the PBoC’s just holding off until the grand unveil. (Write your own jokes.)

My guess is, the Party simply doesn’t know what to do, and by now they probably realize that rate cuts, wherever they’re implemented, are tantamount to pushing on a string. As I’ve been over again and again, there’s just not any demand for credit in China right now, so lowering the cost of it (credit) is pointless. A waste of “ammunition,” if you like.

Macro data covering August was uniformly bad with one predictable exception: Exports were strong. Everything else sucked, if readers will forgive the brief lapse into a colloquial cadence. Imports barely rose, credit creation was anemic, narrow money shrank, producer prices spent a 23rd month (!) in deflation, core consumer prices rose the least in years and retail sales rose at the second-slowest pace since late 2022.

I could go on. It’s bad. I’d join Wall Street in ruling out the 5% annual growth target were it not for the fact that Xi can (and might) simply instruct the national statistics bureau to “meet” it under threat of… well, you know.

In a testament to Xi’s penchant for coercing statisticians, the NBS stopped publishing the youth unemployment rate last year, when it rose enough to embarrass the big man. I wasn’t there, but my guess is that when the jobless rate for young Chinese breached 20% early last summer, Xi called up the bureau and said something not entirely different from, “Get this lower or I’ll kill you.” About six months later, the NBS rolled out an “improved” version. But now it’s rising sharply too.

As the chart shows, even the goal-seeked youth jobless rate is now near 19%, up almost 2ppt MoM and more than triple the (also fake) surveyed urban jobless rate (i.e., the headline unemployment figure). “I thought you fixed this.” “We did, but–” “But what?” “We’ll fix it again.” “See that you do.”

Mercifully, Bloomberg has stopped trying to be polite about the situation in China. Witness this headline from a feature piece (i.e., a piece filed under “The Big Take” banner): “Xi Unleashes a Crisis for Millions of China’s Best-Paid Workers.” The accompanying deck reads: “China created a professional class in record time. Now, just as swiftly, many of their dreams are being crushed.”

You should read that article. It’s quite good. And the pictures, by Qilai Shen, are even better. Xi’s creating a dystopia. It doesn’t look like the dystopia ChatGPT will draw for you if you’re a DALL-E user. There are no burned-out car husks, and the cities are intact and gleaming, not half-destroyed and smoldering. There are no circling crows, nor roving jackals. Xi’s is a dystopia not in the tradition of Hollywood apocalypse films, but rather in an Orwellian sense that seems frighteningly deliberate.

What Xi’s after in China isn’t “common prosperity.” He’s constructing a kind of insular monolith built around a handful of industries and technologies he views as instrumental in ensuring Chinese national security and self-sufficiency. He calls that “high quality growth.” China’s “aspirational classes,” as Bloomberg dubbed Chinese being slowly suffocated by Xi’s creeping totalitarianism, call it other things, if only under their breath.

At the same time, this insular security state of Xi’s is very much outward-looking in its geopolitical ambitions. Indeed, I’d go so far as to assess that Xi aims at least for regional hegemony and quite possibly for global dominion. It’s not a coincidence that the industries and technologies Xi champions in his quest to make China self-sufficient have broad military applications.

Xi is, without mincing words, a madman. The world’s coming around to that reality, but only slowly, and in many parts of the so-called “global south,” he’s regarded as a patron saint, as opposed to what he really is vis-à-vis those countries: An exploitative mob boss keen to rope unwitting locals into a protection racket.

Investors may not understand all, or even most, of the above. But they do understand a three-year-and-counting equity bear market. And they can read the deflation writing on the wall.

The figure above shows a three-year low in China growth optimism among professional investors polled for BofA’s monthly fund manager survey.

Even long-time China optimists are starting to question the merits. As Ray Dalio put it this week, “You have an environment in China which is changing and becoming more difficult.”

Disaffected Chinese are less generous. As The New York Times noted this month, some brave souls willing to chance retribution from the Party have taken to calling Xi’s reign “the garbage time of history.”