THE DISMAL MONTHLY industrial output numbers for May, the weakest year-on-year growth in 17 years, point only too clearly to the binary choice for China’s policymakers: stimulate to keep the economy on track to grow at the 6% annual rate the official target demands, or deleverage to reduce systemic financial risk and continue to rebalance the economy in the cause of long-term sustainable growth.
They are doubling down on the first. Targeted stimulus, undertaken since last year, has come up short in the face of the global slowdown of growth and trade caused by the uncertainty generated by the United State’s foreign policy in general and trade policy in particular, with China directly in the Trump administration’s crosshairs when it comes to the latter.
Fiscal and now increasingly monetary loosening is already underway and local authorities’ are being given renewed licence to take on debt to enable real estate and infrastructure projects, just the sort of investment that ran up public sector debt in the first place, and which has been steadily reined in over the past four years.
There will be more loosening to come. Vice Premier Liu He told the Lujiazui Forum in Shanghai on Thursday that Beijing has plenty of policy tools and is capable of dealing with its various challenges. This was widely taken to be signalling imminent further cuts in either interest rates or the reserve ratio requirements for banks. Liu also put a positive spin on the international pressures on China, saying they would force the pace of rebalancing of the economy and opening of the financial sector.
This Bystander is not holding his breath. The longer deleveraging is put off in the cause of maintaining GDP growth above target, the greater the debt burden grows, and the closer the day of financial reckoning becomes.