From the SMH:
Speaking at the Credit Suisse Asian Investment Conference in Hong Kong, former member of the People’s Bank of China, professor David Daokui told a gathering of over 600 investors that more corporate defaults were needed in China to help “clean up the financial sector,” but that a repeat of the huge 2008-09 stimulus package of 4 trillion Yuan “will never happen”.
“Extra stimulus in the form of speeding up fiscal spending helps growth however that will not mitigate pressure on defaults because they are concentrated in a few regions,” he said.
He added that additional stimulus, such as bond issuance, was necessary to help the economy succeed in its structural reform transition, away from an investment driven growth to an economy powered by consumption.
This sounds about right to me but it depends how we define “stimulus”. There’s little prospect of any explicit monetary loosening, which is the major force driving the creative destruction of rebalancing. On the fiscal side, however, there’s still oodles of productivity-enhancing infrastucture and soft-infrastructure reform to pursue.
So, it’s quite possible for China to rationalise its tired and debt-saturated investment sectors – steel and property development – on one hand and spend on other more useful stuff on the other.
If we view the glass as half full then the balance of these two opposing forces should result in more efficient steel production, and still decent demand for iron ore, which is basically what markets appear to be expecting.
The risk is that the shakeout in the old economy industries turns disorderly, which is quite likely at some point, and that contagion and/or counter-party failures cause an overshoot and wider credit crunch.
Then China would need to bail its banks, and stimulate more aggressively, or drop its growth target much lower.
