China’s Debt Dilemma: Deleveraging While Generating Growth [Part 1]
Much of the media coverage of China’s economy suggests that the country is headed for a financial crisis. China’s mountain of debt is decried, local government finances are labeled menacing, and a property bubble is called disastrous. But this picture is misleading. While China has serious debt problems, with prudent macroeconomic policies and productivity-enhancing structural reforms, the challenges should be manageable if underlying fiscal issues and growth-related reforms are addressed.
China’s Debt Dilemma: Deleveraging While Generating Growth [Part 2]
The Risks Behind the Numbers
While such aggregate numbers make for good headlines, they are not particularly helpful for assessing the risks associated with shadow banking. There is much more to the story.
An implication of the term “shadow banking” is that diverse and distinct forms of nonbank credit can be grouped together under the same heading and thought of in the same way. In reality, each form of credit exhibits a dramatically different risk profile. Pointing to the riskiness of one form of shadow banking (usually trust products or wealth management products) and then citing the overall amount of shadow banking gives a misleading perception of the magnitude of the risks.
China’s Debt Dilemma: Deleveraging While Generating Growth [Part 3]
LONG-TERM OUTLOOK: STRUCTURAL REFORM
Looking at China as a whole, alarmist rhetoric around the country’s short-term debt outlook overstates the system’s vulnerabilities, and the coming property correction is mostly an issue for real production rather than the financial system. That means that while there are likely to be defaults and a rise in nonperforming loans—legitimate concerns for investors in China—it is difficult to see how the situation could deteriorate so much that it would lead to a systemic financial crisis and derail the economy.
China’s Debt Dilemma: Deleveraging While Generating Growth [Part 4]
NOTES
1 Wang, “Three Big Questions and the Most Important Chart,” UBS Macro Keys, January 2014.
2 That China’s debt is relatively high is not particularly surprising for a country with such a high savings rate and a bank-dominated financial system, both of which are traits associated with high debt.