How goes Chinese rebalancing?

From Lombard Street:


Following a surge in new loans earlier this year, investors are concerned again about the sustainability of China’s debt. Severe producer price deflation and decimated profits show just how unproductive investment has been. The good news is that China’s total non-financial debt is still low compared to most advanced countries, and the government has room on its balance sheet to take on the bad debt of nonfinancial corporates.


China has made good progress with financial reforms. However, the danger is that, without the threat of Armageddon, the authorities will not make the tough choices needed to shore up growth and support the transition to a consumer-led economy. In Q1, Beijing fell back on old-style stimulus, racking up yet more debt. In some senses it is treading the route Japan took on its way into its decades of stagnation.


Critically, China has so far refused to let failing companies actually fail on any serious scale.

  • This approach has already resulted in a massive slowdown in productivity, compromising China’s ability to grow its way out of the debt problem. To avoid a Japan-type sinkhole, we highlight five policy priorities:
  • Fiscal policy must determinedly refocus on boosting household income
  • Financial sector reforms must continue so that the market can play a greater role in allocating capital; non-bank financial institutions must be given more scope to create stores of wealth so that households can begin to garner more property income and shadow banking can come out of the shadows
  • Failures must be allowed to fail to release underutilised resources
  • Disincentives to the free movement of labour must be dramatically reduced so that workers displaced by the transition from the industrial past can have some chance of finding new jobs in the consumer-led future
  • Bank balance sheets must be cleansed and lending undertaken on a marketoriented basis

To achieve a demand-side revolution, China needs to complete its supply-side reforms. The temptation is to allow the supply side to muddle through, but low quality supply will not support consumer-led growth. Letting failed companies fail, building a strong financial sector around market-orientated banks, and allowing labour to move to where it can be efficiently employed would generate a rebound in productivity and ensure that households receive adequate returns on capital.


In short, income from the production of goods and services must flow through capital channels to the household sector where it can be spent so that supply may perpetuate demand rather than weigh on it.

In short, Chinese rebalancing is proceeding somewhere between slowly and badly. I mean, check out that TFP trend! The obvious corollary is that the great Chinese slowing has far yet to run.

David Llewellyn-Smith
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  1. China is “racking up yet more debt…. treading the route Japan took on its way into its decades of stagnation”.
    May I suggest that stagnation in Japan is not due to bad-debts of the past but due to –
    1) high wages
    2) declining domestic demand (population decline and satisfaction of its physical infrastructure needs)
    3) a cultural(?) choice to automate its services
    China’s economy now is not like Japan’s today in any respect; more like Japan’s of the 1970’s.

    • I’m not sure Olympus would be on its own? “one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history”. The Japanese banks might eventually be seen to leave Olympus in the shade…..

    • The bloke starts out alright but then he makes this idiot statement
      “most advanced economies themselves are struggling with too much savings of their own,”

      We don’t have savings! We over-consume. We run CAD’s that are financed
      1. In our case by selling assets to China, U.S. EU etc
      2. In the case of the U.S. by printing up (one form and another) USD$600B a year plus whatever paper USD they need to buy up companies in other parts of the world. This, in effect, leaves the whole world over-flush with USD

      Fair dinkum! This idea of ‘excess savings’ in the Western world needs to be flushed to the intellectual sewer it belongs in.

      Now I don’t know whether the planet this bloke is on includes China or if he has ever been there?
      “I would have liked to see a parallel emphasis on a set of policies that would help to lower China’s high national saving rate.”
      The government has been attacking this issue for for 20 odd years that I’m aware of with a lot of different policies in regard to wages, superannuation and health care benefits. The Chinese people come from a place of having little that very very few of us can even comprehend let alone those who rule us, or are idiot economists, could imagine. Savings are a part of the place and its people – end of story…so far.
      It’s a big ship that is slow to turn.

      • Hey, 10% savings is too much! We need that number lower – we need to go deeper! we need to go … negative!

        Dunn dunnn dunnnnnnnnnn!

  2. The Chinese government can take on the bad debt of its banking system until the second coming. It may influence inflation and the exchange rate but the Chinese government will never go bankrupt or fail to repay (unless it decides to).
    China is a financial sovereign. It issues it’s only money and collects taxes in it. It has an army and police force and can and will repress its citizens if it sees the need. It can confiscate/compulsorily acquire any competing “currency” if it so decides. No Chinese resident will refuse to accept payment in chinese money while ever they need it to pay taxes and it is accepted in exchange for goods. The chinese currency is a fiat token system. Whatever token is approved by the Chinese government will be used, no matter the state of the sovereign balance sheet. The token can be printed notes, coins or digital balances in banks.
    Whereever (geographically and by sector and by business/entrepreneur) the Chinese government wants to stimulate it simply tells banks to lend and the banks then create money out of nothing as per the bank of England paper on money creation, or the chinese government stimulates through direct expenditure on infrastructure, housing, social security, asset purchase.
    The last thing they need to worry about is government bankruptcy and international ratings agencies, particularly as they normally run a Current Account surplus and can then acquire offshore assets so don’t need to acquire foreign currency by borrowing it.

  3. And it is written that 6rmn new chinese debt contributes 1rmn GDP, whereas Australian takes 9$ for 1$ GDP.