It would funny to watch as Chinese policymakers attempt to pull off the impossible if it weren’t so downright frightening.
Beijing, long the global engine for growth and trade, finds itself at a rather vexing crossroads. NBS protestations to the contrary, the Chinese economy is decelerating rapidly in the face of a massive rebalancing towards consumption and services-led growth. The country’s move away from a smokestack economy has for all intents and purposes reset assumptions regarding how we think about global trade.
When the perpetual commodities bid from China disappeared, it became quickly apparent that sluggish growth may simply be something the world has to live with for the foreseeable future – especially considering the malaise gripping Brazil and Russia and uncertainties around whether or not India will be able to carry the entirety of the BRICS’ burden.
The problem for the Chinese is that although they have far greater counter-cyclical policy room than does the US or Europe, they’re effectively hamstrung by a massive debt burden that amounts to more than 250% of GDP. You don’t necessarily want to go adding more leverage at a time when an acute overcapacity problem and the attendant slump in commodities has created a situation wherein entire swaths of the industrial sector aren’t able to service their existing debt.
But without more leverage, the economic deceleration becomes even more acute. Which leads us to the conclusion we drew long ago: China is attempting to deleverage and re-leverage at the same time – and that’s obviously impossible. You can see examples of this policy schizophrenia everywhere. For instance, in January, TSF grew by a massive $500 billion and yet meanwhile, Beijing is busy discussing how to kill off unprofitable, highly indebted “zombie companies.”
The proverbial cherry on top is the yuan devaluation debacle which makes it difficult for the PBoC to ease further if they want to avoid exacerbating expectations of a much weaker currency – expectations that led directly to massive capital outflows last year.
