Some things to watch for in 2018: Part One
Special points to highlight in this issue:
• Because China still has debt capacity, GDP growth in 2018 will be broadly equal to whatever Beijing sets as its GDP growth target. It is extremely unlikely, however, that Beijing will set the target at anywhere close to the level that allows regulators to regain control of runaway credit growth.
• Because growing public sector infrastructure investment is required to help China achieve any GDP growth target it chooses above roughly 3 percent, we can expect that public sector infrastructure investment will continue to rise as a share of total Chinese domestic demand.
• Household income growth outpaced GDP growth in 2017 by 0.7 percentage points. This represents some rebalancing, of course, but at this rate it will take China 25-30 years to achieve even the lowest acceptable rebalancing of domestic demand.
• As GDP growth continues to slow, we are likely to see local governments react in ways that interfere with the efficiency of monetary management. Given extremely high debt levels, this is likely materially to impact growth prospects in a self-reinforcing way.
• For all the discussion about enforcing market discipline by eliminating explicit or implicit government guarantees on local-government and corporate borrowings, any credible reintroduction of credit risk is likely to cause an unacceptably large and disorderly pricing adjustment.
Now read on...
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