Via the ECB comes a new report into what Chinese rebalancing means for Europe and the global economy:
Although vulnerabilities have grown, China retains policy space to cushion against potential adverse shocks. China has high national savings, large foreign exchange reserves and a current account surplus, which help to shield it against an external funding crisis. An estimate of augmented general government debt, which accounts for contingent liabilities and off-balance-sheet local government borrowing, has risen in the past five years but, at around 60% of GDP, affords some space to react to emerging shocks. Moreover, despite slowing growth, the interest rategrowth differential remains favourable. The government also has significant public assets including the stock of foreign exchange reserves (despite the declines in the past two years). Importantly, the government also retains levers to manage the economy, particularly through its close links with SOEs and banks.
However, additional rebalancing and reform could help to move China onto a more sustainable growth trajectory in the medium term. In the past, short-term stimulus to bolster economic activity in the face of slowing structural growth and widening imbalances has helped to stabilise growth. However, continued reliance on such measures could eventually deplete policy buffers. An adjustment to the structure of production and demand, including less reliance on investment and credit-driven growth, could support the transition towards a more balanced growth path.