Expect a Surge In Debt

  1. The fierce debate continues in Beijing between those who are more worried by rising debt and those more worried by slowing growth. Among the former, two weeks ago Lou Jiwei said it was time to study an orderly exit of loose monetary policies...
  2. while PBoC Vice Governor Liu Guoqiang warned of tighter monetary policy “sooner or later”. Now, among the latter, we have Liu Shangxi saying “As to whether [the PBOC] should exit its monetary stimulus, I think it’s not the right time, not even for a marginal tightening.”
  3. I don’t know how this eventually plays out, but I suspect that given the surge in debt this year and the recent scare in the bond markets, the former will have the upper hand. That is why I disagree with the expectations of most analysts, who seem to be expecting  GDP growth next year between 8% to 9%, or more.
  4. Morgan Stanley, for example, just came out with a 9% projection, while the IMF has lowered its original 9.2% projection to 8.2%. I think those numbers are too high.
  5. Since April I’ve expected next year’s GDP growth to be much lower – probably 6-7% – for the same reason that this year I expected it to be higher than others expected (my 2-3%, versus their close to or well below zero).
  6. As I see it, Beijing implicitly targets the minimum growth rate it can politically accept, with local governments and real estate developers acting as the residual to bridge the gap between whatever the real economy does and the GDP target. 
  7. This year, for example, when the real economy almost certainly contracted, local governments and real estate developers expanded sharply to drive positive growth, and while much of this growth added nothing to the country’s productive capacity, the result was the 25-percentage-point surge in the country’s debt ratio.
  8. Next year, however, I expect the real economy to rebound sharply, driven by consumption and business investment, but because I don’t think Beijing needs much above 6% GDP growth for political reasons, and because of the sharply worsening debt condition 
  9. This year, I expect this will allow Beijing to cut back on local government investment and real estate development. In fact I wouldn’t be surprised if in 2021 China’s debt-to-GDP ratio were flat or even down one or two percentage points.
  10. Unfortunately, however, while the debt to GDP ratio may improve slightly next year, it will resurge soon after. Beijing’s goal of doubling GDP by 2035 requires very rapid growth in debt, so much so that after a few years I am pretty sure they'll quietly abandon that goal.

Pettis was commenting on on the article China must maintain coronavirus stimulus to ensure full economic recovery, says prominent Beijing adviser.

Those points, especially point number 10 of his Tweet Thread are something to consider for those who believe the Renminbi (yaun) is undervalued.

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