China in the Debt-Deflation Trap

[dancingshoes]

The debt-deflation cycle begins with an imbalance or displacement, which fuels excessive exuberance, over-borrowing, and speculative trading, and ends in bust, with procyclical liquidation of excess capacity and debt causing price deflation, unemployment, and economic stagnation. The result can be a deep depression.

The advanced countries have fallen into the debt-deflation trap because they were unwilling to accept the political pain of real-sector restructuring, relying instead on financial engineering and loose monetary and fiscal policies. Here, China’s one-party system provides a clear advantage: the country’s leaders can take politically painful decisions without worrying about the next election. One hopes that they do.

Read more at https://www.project-syndicate.org/c...eng-and-xiao-geng-2015-09#KSXXw9y3xC3IeriU.99

 

[dancingshoes]

The final piece of the puzzle for China is realism. As it stands, the Chinese government is keen to maintain decent growth of about 7% annually while pushing for rebalancing and reform. The risk is that, until reform measures take effect, the authorities may rely on short-term stimulus to meet growth targets, aggravating resource misallocation and structural vulnerabilities. Considering that China’s total debt reached 282% of GDP last year – surpassing America’s debt level – further reckless lending to local governments and private enterprises from the shadow banking sector would hold the economy hostage to the growing risk of a financial crisis.

China should lower its growth target to about 6% in the coming years. That way, it could pursue the deep reforms that are needed to move the economy onto a more balanced and sustainable long-term growth path.

Read more at https://www.project-syndicate.org/c...n-by-lee-jong-wha-2015-09#4iyXiwrJmEDH2MJv.99