Is Beijing backsliding on rebalancing?

CHINA FINANCIAL - In Brief 18 May 2015 by Michael Pettis

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Yes and no. The PBoC cut lending and deposit rates May 10, but raised the deposit ceiling and pressured banks to maintain deposit rates. They’re trying to rebalance but it's tough. Growth was probably unexpectedly low, but for the past 3-4 years I've said growth must grind lower because Beijing can only either let debt rise, let unemployment rise, or increase wealth transfers to households, which is still politically tough. Unemployment isn't yet a problem except in the northeast, which is SOE country, and so job losses were minimized. That means, however, more debt. Ultimately I expect they'll order more infrastructure spending, and so growth in the 2nd or 3rd quarters might keep us within the 7% target, but then credit growth would have to rise 2-3 points, maybe to 14-15%, which is too high and will eventually force them to lower growth targets. I think this stop-and-go rebalancing is still the best we can expect. Deflation is a big problem. Negative GDP deflators accelerate the gap between debt and debt-servicing capacity. Beijing still thinks looser money is inflationary, but I’m increasingly thinking heretical thoughts. Monetary expansion, lower interest rates, and even depreciating currency seem to reduce household income and subsidize producers, and so may actually be disinflationary. Of course Beijing never does heresy, so we'll have to wait and see what happens, but while you can and should worry about the growth and debt numbers, you shouldn’t be surprised.