Beijing must implement balance-sheet reforms
Special points to highlight in this issue:
• Forecasting GDP growth in China over the rest of 2016 is a fairly meaningless exercise, not because there is too much economic uncertainty for an accurate forecast but rather because growth will be determined as the outcome of a political exercise based on the need to consolidate power before and during next year’s Party Congress. Even though it seems that the economic impact of state-directed investment is waning, as long as China has sufficient debt capacity it can achieve whatever GDP growth target it chooses, and it probably has debt capacity for another 2-3 years.
• In the medium term, however, and well before the end of this decade, there should be absolutely no question that growth will slow significantly, to well below half current levels. Beijing’s reforms will succeed in minimizing the cost of adjustment only to the extent that Beijing moves quickly to write-down or pay down its outstanding debt burden. Until it does so, all other reform strategies are likely to be ineffective in containing debt. If Beijing fails to pay down debt, growth will continue, albeit weakly, until China reaches debt capacity limits, in which case debt will be amortized in a chaotic and uncontrolled way.
• Paying down or writing down debt means nothing more than allocating the cost of the debt to some economic sector or another. Either Beijing can choose the sector that is best placed politically or economically to absorb the cost, or the cost will be allocated in a disorderly and unplanned way.
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