Yes, China seems to be in serious trouble, I recently saw parts of this interview, which was very informative in understanding China’s current issues.
According to Richard Koo (chief economist at Nomura Research Institute, and pioneer of the “balance sheet recession” phenomenon), China is entering a balance sheet recession (similar to that of Japan in 1990 and the US in 2008)
- Declining real estate prices are undermining household and corporate wealth, leading to increased savings and debt repayment efforts to stabilize balance sheets.
- As private sector borrowing decreases, the funds repaid on debt are flowing back into the financial system, but financial institutions are finding it difficult to allocate these funds due to weak borrowing demand.
- Despite ultra-low interest rates, borrowing demand remains subdued, leaving the central government as the only entity capable of taking on debt to stimulate the economy.
- The key issue in China is that the central bank seems reluctant to acknowledge the country is facing a balance sheet recession. It is not implementing a sufficiently large fiscal stimulus, which is crucial in such a situation because monetary policy alone (low interest rates) is ineffective.
- China initiated large fiscal stimulus since 2016, increasing deficits to around 6% to support the economy as corporate savings increased and investment slowed. The government’s reluctance to increase stimulus currently is due to concerns about deficits potentially rising to 10-12%.
- Many local governments are insolvent currently, limiting their ability to provide stimulus, leaving the central government alone to act. Without action, China risks a deeper deflationary cycle, signs of which are already emerging.
- China is already the largest trade surplus country, due to the political situation they wont be able to export their way out of this recession, since the rest of the world wont let it.
