Free Lunch: China's dilemma

Δημοσιεύθηκε: 13 Μαρτίου 2015 - 12:12

Flooring it, and then some?

The Chinese economy is more similar to the rich world than many think, at least in one respect. It has relied disproportionately on credit to grow. The result is that it now faces a dilemma: how to prod the economy to keep growing at satisfactory rates while dealing with the consequences of the earlier stimulus policies.

The Chinese government last week lowered its target for GDP growth to about 7 per cent per year. That's of limited importance, given that officially recorded growth will be whatever the government decides, and the history of central planning leaves little doubt that it will decide its target has been met. The bigger question is whether China, official numbers aside, can avoid the steep slowdown signalled by alternative data. Last week Morgan Stanley's Ruchir Sharma argued in an FT comment that Chinese growth could be as low as 4-5 per cent.

David Dollar at Brookings reckons that China can actually achieve its targets, but that will require continued fiscal and monetary stimulus. On the fiscal side, dollar worries that new measures to restructure the opaque liabilities of local governments could hold back spending. That worry, however, seems misplaced. The trillion-RMB debt swap, designed to deal with legacy debt, is at least as likely to ease funding constraints on local budgets by reducing interest rates. In addition, the quotas for new borrowing are expanding. Overall, it looks like China's fiscal policy is moving firmly into expansionary territory:

On the monetary side, too, there have been easing moves in response to low inflation. These include interest rate cuts and lower reserve requirements. FTAlphaville has in the past suggested that such steps may be better seen as attempts to neutralise other liquidity-squeezing effects such as capital outflows rather than outright loosening. But a WSJ report on a surprise rate cut at the start of the month tells of a broader shift in outlook at the People's Bank of China, reflecting a marginalisation of the cautious governor Zhou Xiaochuan.

If China must choose to be gored by one or the other horn of its economic dilemma, has its leadership already opted for erring on the side of excess? It does, at least, seem wise to doubt promises to avoid excessive stimulus for now. That means China's enormous debt problem could get worse before it gets better. Even solving the macroeconomic difficulties would not begin to address the structural reforms China needs. Despite these difficulties, of course, China will remain a huge economic hub - including by increasingly becoming a linchpin of demand, as the Economist writes today. But for now, a soft landing, let alone a smooth glide path, is still far from guaranteed.

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