1/9
An influential Beijing think tank says in a recent article that the PBoC will have to cut interest rates in order for China to achieve GDP growth of at least 5% next year.
scmp.com/economy/econom… via @scmpnews
An influential Beijing think tank says in a recent article that the PBoC will have to cut interest rates in order for China to achieve GDP growth of at least 5% next year.
scmp.com/economy/econom… via @scmpnews
2/9
Authorities need to boost domestic demand, the authors say, including consumption and investment, to counter the property slump and any slowdown in exports, or else GDP growth will remain low.
Authorities need to boost domestic demand, the authors say, including consumption and investment, to counter the property slump and any slowdown in exports, or else GDP growth will remain low.
3/9
If China’s problem were that Chinese businesses are eager to expand production facilities to meet surging demand, but are unable to do so because borrowing costs are too high, this would make sense, and the resulting growth would be sustainable.
If China’s problem were that Chinese businesses are eager to expand production facilities to meet surging demand, but are unable to do so because borrowing costs are too high, this would make sense, and the resulting growth would be sustainable.
4/9
Given Beijing’s eagerness in recent years to boost private sector investment, however, I’d be really surprised if that were the case, and anyway analysts like those at @ChinaBeigeBook seem to have trouble finding these investment-hungry businesses.
Given Beijing’s eagerness in recent years to boost private sector investment, however, I’d be really surprised if that were the case, and anyway analysts like those at @ChinaBeigeBook seem to have trouble finding these investment-hungry businesses.
5/9
So how will lower rates work? According to the article they enhance asset valuations in the private sector and can significantly lower debt burdens, thus freeing up household and business income for additional spending.
So how will lower rates work? According to the article they enhance asset valuations in the private sector and can significantly lower debt burdens, thus freeing up household and business income for additional spending.
6/9
That’s true, but it’s important to understand how that affects the economy. Instead of boosting productive investment, lowering interest rates in this case is simply a way of allowing rising debt to boost demand. It encourages debt both directly, and indirectly by eroding...
That’s true, but it’s important to understand how that affects the economy. Instead of boosting productive investment, lowering interest rates in this case is simply a way of allowing rising debt to boost demand. It encourages debt both directly, and indirectly by eroding...
7/9
bank margins, which effectively increases the contingent liabilities of the banking system. The resulting growth is no different, in other words, from the “inflated” growth that comes from borrowing to fund non-productive property and infrastructure investment.
bank margins, which effectively increases the contingent liabilities of the banking system. The resulting growth is no different, in other words, from the “inflated” growth that comes from borrowing to fund non-productive property and infrastructure investment.
8/9
We are still stuck with the three options Beijing faces that I have been writing about for several years: because China cannot rely on an ever-expanding trade surplus, Beijing must ultimately choose between rebalancing income, more debt, or lower growth.
We are still stuck with the three options Beijing faces that I have been writing about for several years: because China cannot rely on an ever-expanding trade surplus, Beijing must ultimately choose between rebalancing income, more debt, or lower growth.
9/9
China has been unable yet to rebalance income, so if it does not want much lower growth, it must choose more debt. This means that if it reins in debt in the property sector, it must expand debt somewhere else. That's probably what will happen.
carnegieendowment.org/chinafinancial…
China has been unable yet to rebalance income, so if it does not want much lower growth, it must choose more debt. This means that if it reins in debt in the property sector, it must expand debt somewhere else. That's probably what will happen.
carnegieendowment.org/chinafinancial…
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