China: Buying Time Is Not Cheap

Jan 23 20:01 2020 Print This Article

While China should again contribute around 1 percentage point to global growth in 2020, we found on our latest research trip to Beijing that secular risks remain biased to the downside.

In prioritizing stability over all other objectives, China is borrowing from future growth while reducing policy ammunition to counter unexpected shocks. Given the renewed rise in already high debt levels, growing fiscal deficits and declining foreign exchange reserve coverage of monetary liabilities, we judge that it is becoming increasingly costly for China to buy time. Our macro conclusions, based on discussions with government policymakers and corporate executives, are two-fold:

First, China’s strategic growth plans – prioritizing quality over quantity – are hamstrung by the paramount objective of stability. The definition of stability in the Chinese context has morphed from one of upholding the government’s legitimacy via policies to support high growth, full employment, and ever-rising living standards to one of risk management – namely, preserving financial independence and popular legitimacy by mitigating financial stability risks, reducing ecological threats (pollution) and alleviating poverty.

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