How long will China’s slowdown last?

CHINA FINANCIAL - Report 18 Jun 2018 by Michael Pettis

Special points to highlight in this issue:
• A sharp slowdown in economic growth in May was preceded by a sharp slowdown in credit growth. Analysts are confusing the slowdown in credit growth with the deleveraging process, and will undoubtedly point out that Chinese deleveraging is causing growth to slow.
• But China is not deleveraging. Even the most optimistic interpretation of the data suggests that credit is growing 10-15 percent faster than the economy, and that China debt ratios are getting worse. My own estimates suggest that debt is still growing twice as fast as debt-servicing capacity.
• The real question is about the way in which Beijing will respond to slower growth. Will it tolerate the slowdown and continue to try to control credit creation, at the cost of even slower growth, or will it again panic and step on the credit accelerator? Over the rest of 2018 that is what we should be monitoring.

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