Rebalancing, Deleveraging and Sustaining Growth in China

Abstract

The Chinese economy is facing some critical challenges in the recent years. As it rebalances the economy away from investment and toward consumption, output growth has slowed down and the corporate sector struggles with falling profitability and increasing debt. On the other hand, the efforts to rein in credit expansion and deleverage have yielded limited success. This article analyzes China’s debt issue— the causes, patterns, and possible consequences of debt accumulation. Based on the analysis, this article provides a critical assessment of the current policy measures in dealing with rebalancing and deleveraging and proposes some alternative policy actions.

Keywords:

• monetary sovereignty
• rebalancing and deleveraging
• shadow banking

ACKNOWLEDGMENT

The author would like to thank Eric Tymoigne for his comments on an earlier draft. The usual disclaimer applies.

Notes

Nevertheless, credit expansion continued but it did not effectively finance productive investment. More on this point later.

Although the profits may have been reduced due to the rising funding costs for WMPs in 2017.

For references of deriving the profit equation, one is referred to Kalecki (1942) and Levy (1943).

According to some commentators, this level still underestimates the actual level of debt by about 10 trillion yuan ($1.47 trillion) because it excludes new forms of debt, such as public-private partnership debt (the Diplomat.com, July 18 2017).