By Damien Ma and Houze Song Like many, we have been grappling with what to make of the Chinese economy’s prospects. It is evident that serious risks have built up, the manifestation of which is already apparent in the property sector. The key question is whether this is another cyclical speed bump—a tempest in a teapot—or the making of a protracted crisis.
Not quite sure I follow the slowdown flowchart, and would appreciate some elaboration: LGFVs default --> Regional banks default --> Central govt bails out some LGFVs while big banks take over regional banks --> Central govt raises tax rates and local govts cut services --> Slow growth for years as consumers save rather than spend and private companies reduce investment. Is that right?
It’s widely recognized that Chinese people like to save more than most. This, in the slow-growth environment you forecast, will raise unemployment and turn China into an exporter of deflation unless the government spends enough to enable households to hit their saving targets without causing unemployment to rise.
"At a macro level, a Chinese economy that will grow significantly below its potential for many years..." I think it is more proper to say that the Chinese economy has been growing well above its potential over the past decade as LGFVs over-invested and loaded up on leverage.
Not quite sure I follow the slowdown flowchart, and would appreciate some elaboration: LGFVs default --> Regional banks default --> Central govt bails out some LGFVs while big banks take over regional banks --> Central govt raises tax rates and local govts cut services --> Slow growth for years as consumers save rather than spend and private companies reduce investment. Is that right?
Can you please expand on the "deflationary risks" mentioned above?
It’s widely recognized that Chinese people like to save more than most. This, in the slow-growth environment you forecast, will raise unemployment and turn China into an exporter of deflation unless the government spends enough to enable households to hit their saving targets without causing unemployment to rise.
"At a macro level, a Chinese economy that will grow significantly below its potential for many years..." I think it is more proper to say that the Chinese economy has been growing well above its potential over the past decade as LGFVs over-invested and loaded up on leverage.