China: Economy at a crossroads - Commerzbank
Analysts at Commerzbank suggest that Chinese government is in a tough spot as the current stock of debt seems only sustainable in the long-run if China succeeds in enhancing productivity and transforming its growth model away from the overwhelming reliance on (debt-financed) investment towards consumption.
“A more efficient financial intermediation requires a more market-based selection of investment projects which is unlikely to be achieved without debt write-offs and bank recapitalization that clear banks’ balance sheets. Hence, this strategy comes at a (political) cost of at least temporarily higher unemployment and therefore lower consumption that temporarily dampens growth but promises sustainable long-term productivity gains that could turn around China’s moderate growth outlook. However, this implies a fundamental reform of Chinas current economic system from omnipresent state control to a more market-based resource distribution – and we don’t think that the leading political class is willing to cede a substantial share of its control and power.”
“Instead, China seems still caught in its current growth model which continues to rely on credit-financed, inefficient investment. As growth continues to moderate, investment becomes less and less efficient and productivity growth declines. Clearly, such a scenario is not sustainable and vulnerabilities rise over time and could eventually culminate in financial crisis and disruptive adjustment. While we believe, that it is not yet too late to avoid this scenario, a turn-around becomes more and more difficult as debt levels rise which reduces the scope for an orderly structural adjustment.”
“Our main focus in 2019 will therefore be to develop reliable productivity measures that could give us a first indication of whether the Chinese government may be trying to achieve a more efficient distribution of new loans after all. But as long as these indications are missing, we remain pessimistic which is the main reason why we forecast a further moderation of growth to 6.3% yoy in 2019 and stick to a bearish CNY outlook.”