Thursday, January 28, 2016

This is how to tell whether China is really heading in the right direction

Economist Michael Pettis, a superstar of China analysis, wrote a must-read (but massive) blog post on the state of the Chinese economy and whether planned reforms are likely to work.
There are a lot of uncertainties in terms of timing and policy implementation, he said.
What Pettis considers a certainty is how the world will know China's serious problems with debt and overcapacity are being dealt with.
From his blog post:
It is only when credit growth begins to decelerate much more rapidly than nominal GDP growth that we can begin to talk hopefully about China's moving in the right direction, and it is only when credit growth falls permanently below the growth rate of the economy's debt-servicing capacity that China will have adjusted.
China's economy is transitioning from a system based on investment to one based on consumer consumption. During those investment years, China's massive state-owned enterprises racked up a ton of debt, and now it's making them unproductive.
When companies are paying off debt, they're not reinvesting or expanding. They're not hiring people. They may have to lay off workers. Worse, down the line, they may not be able to pay their creditors.
You see how this is a problem.

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