The Evolution of the Chinese Debt Burden
Special points to highlight in this issue:
* Chinese domestic bond markets performed badly last week, in a foretaste of what we are likely to see in 2017, and probably more than once.
* In previous newsletters, I have written about my medium-term outlook for the Chinese economy: until China reaches its debt-capacity limits, probably within 2-3 years at most, GDP growth will continue to slow in an orderly way, to 3-4% or less before the end of the decade and the debt burden will continue to rise at an accelerating pace. The pace of the GDP growth deceleration will be determined largely by how quickly the president is able to centralize power further, and the more rapidly GDP growth decelerates, the less likely China is to reach debt capacity limits and the lower the overall adjustment cost will be in the medium and long term.
* The key is the evolution of Chinese debt, and so far this has occurred largely in line with the incentives that were created and institutionalized within the Chinese financial system in the 1990s and 2000s.
* If we want to understand how debt will evolve in the coming years, we must understand how the current set of incentives will drive future growth both in the Chinese economy and in the structure of its debt.
Now read on...
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