Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19
Palladium, Darling of the PGEs, Shifting into High Gear - 13th April 19
MMT is a spectacularly Dem idea - 13th April 19
The 'Silver Lines' of Opportunity - 13th April 19
Gold Stocks Bull Market Breakout Potential - 13th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

China’s First Half of 2017: Growth amid Deleveraging 

Economics / China Economy Jun 28, 2017 - 03:37 AM GMT

By: Dan_Steinbock

Economics

Despite seemingly mixed messages, China’s great shift from easing to tightening has begun. While growth will continue to decelerate, it can still remain on the deceleration track, even as deleveraging has begun.

In May, Moody’s Investor Service downgraded China’s credit rating. But it took less than a day for Chinese financial markets to recover from the downgrade. Recently, index giant MSCI announced the partial inclusion of China-traded A-shares in the MSCI Emerging Market Index. After all, China is currently under-represented in global equity indices relative to its economic influence. The inclusion is predicated on a long and gradual move.


In brief, Moody’s believes that the rapid rise of Chinese debt has potential to degrade its future prospects, while MSCI thinks that China’s future is grossly under-valued. One focuses on the cyclical story; the other on the secular potential.

There is a reason to seemingly mixed messages: Like advanced economies, China has now a debt challenge. Yet, the context is different and so are the implications.

The debt difference

In 2015, US total debt (private non-financial debt plus government debt) exceeded 251 percent of the economy. Except for Germany (166%), the comparable figures in other major European economies are reminiscent of those in the US, including UK (249%), France (278%), and Italy (253%). In Japan, total debt exceeds a whopping 415 percent of GDP. In China, it was 221 percent but it has grown very rapidly.

The numbers illustrate the stakes, but not the story. In advanced economies, total debt has accrued in the past half a century, decades following industrialization. After rapid acceleration amid industrialization and the move to post-industrial society, their growth has decelerated, along with excessive debt burden in the postwar era.

The advanced economies’ debt is the result of high living standards that are no longer fueled by catch-up growth and are not adequately backed up by productivity, innovation and growth. So living standards are sustained with leverage.

In China, total debt accrued in the past decade, amid industrialization. Unlike advanced economies, different regions in China are still coping with different degrees of industrialization. As the urbanization rate is around 56 percent, intensive urbanization will continue another decade or two.

Due to differences in economic development, Chinese living standards remain significantly lower relative to advanced economies. Yet, rising living standards, which the central government hopes to double in 2010-20, are fueled by catch-up growth and supported by productivity, innovation and growth.

In advanced economies, debt is a secular burden; in China, it is cyclical side-effect. In both, left unmanaged, it has potential to undermine future.

Rapid rise of Chinese debt

Why did Chinese debt rise so rapidly? Even in 2008, it was still 132 percent. Only a tenth was central government debt (17%), most involved private debt (115%).  In 2015, government debt was about the same (16%), but private debt had soared (205%).

The dramatic increase can be attributed to two surges. The first is the result of the massive $585 billion stimulus package of 2009, which contributed to new infrastructure in China and to global growth prospects. But it also unleashed a huge amount of liquidity for speculation, which is today reflected by excessive local government debt (included in private non-financial debt data).

Another sharp surge followed in 2016, which saw a huge credit expansion as banks extended a record $1.8 trillion of loans. It was driven by robust mortgage growth, despite government measures to cool housing prices. As a result, credit was growing twice as fast as the growth rate.

But since late 2016 the cyclical story has been shifting.

Deleveraging has begun

For years, policymakers have advocated tougher measures against leverage, which have been expected to follow the 19th National Congress of the Communist Party in the fall. The big news is that deleveraging has already begun. Concurrently, global pressures have increased with US Federal Reserve’s rate hikes.

In late 2016, POBC adopted a tighter monetary stance and has increased tightening in the ongoing year. In May, according to Reuters, total social financing fell to $156 billion from $200 billion, much more than analysts expected. As the decline was driven by non-bank financing, broad M2 money supply expanded by less than 10 percent on a year-to-year basis, the weakest pace in two decades.

For now, policymakers’ deleveraging is on track, as long as it does not downgrade the growth target. In China, it is a medium-term project. In advanced economies, deleveraging is likely to take far longer. But they will not succeed without structural reforms – just as China is already executing reforms to rebalance the economy toward consumption and innovation.

The author is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

The original version was published by China Daily on June 28, 2017

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

The original, slightly shorter version was published by South China Morning Post on February 28, 2017

© 2017 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules