China’s debt problems have emerged so much more rapidly and severely this year than in the past that a growing number of analysts believe that this may be the year that China’s economy breaks. There is no question that China will have a difficult adjustment, but it is likely to take the form of a long process rather than a sudden crisis.
A recent article by Joseph Stiglitz suggests that the United States runs a current account deficit because its people save too little to fund domestic investment. In fact, he may have it backwards: Americans may save too little precisely because the United States runs a current account deficit.
China’s problem is excessive debt in the economy, not a banking system facing insolvency. Beijing’s reform strategy should reduce the debt burden as quickly as possible to minimize the economic costs.
There is no way Beijing can address its debt problem without a sharp drop in GDP growth, but as unwilling as Beijing may be to see much lower growth, it doesn’t have any other option.
China is embarking on ambitious economic reforms to boost its growth prospects. What is the rationale behind these new reforms and what are the prospects for their success?
While it is difficult to predict the nature and timing of the shocks buffeting China’s economy, China’s difficult economic situation makes such crises inevitable.
Some analysts contend that the RMB is no longer undervalued but is in fact overvalued. However, a more careful analysis suggests that the yuan is still undervalued, but perhaps not by much.
The value placed on current and future growth says a lot about the quality of that growth. It also has important policy implications, especially for reforms.
The biggest constraint to the EU’s survival is debt. Europe will not grow and unemployment will not drop until the costs of the excessive debt burdens are addressed.
If the world does indeed face another decade or two of “superabundant capital” in spite of economic stagnation and slow growth, the historical precedents suggest a number of consequences.
Chinese economic growth will continue to slow. Although many economic analyses are based on the success of economic reforms, near-term growth is more accurately forecast in terms of balance sheet constraints.
China’s consumer price index (CPI) and producer price index (PPI) data suggest that China is facing deflationary pressures. Beijing must tackle the country’s debt and create alternative sources of demand to address them.
While China is a more integrated optimal currency zone than the EU, there are still frictional costs across provinces that will require Beijing to make some adjustments, which have their own costs.
Instead of a hard landing or a soft landing, the Chinese economy faces two very different options, and these will be largely determined by the policies Beijing chooses over the next two years.
While debt plays a key role in understanding the recent evolution of the Chinese economy and the timing and process of any further adjustment, there seems to be a remarkable amount of confusion as to why debt matters.
The European Central Bank has managed to head off the liquidity crisis that Spain and other peripheral countries faced, but little has been done to address concerns about solvency or global imbalances.
The fact that Beijing can recapitalize China’s banks during a debt crisis should not be reassuring: the debts must still be paid, and doing so will decrease demand and slow future growth.
China’s low level of social capital constrains its ability to absorb additional capital stock productively, causing the country to over-invest.