Or Global Reflation As China Begins Tightening

Until recently, the conventional wisdom was that China’s contribution to global reflation would be increasingly accompanied by those of the US and Europe. Yet, the realities may look grimmer than anticipated.

Usually, the term ‘reflation’ is used to describe the first phase of economic recovery after a period of contraction. More recently, ‘global reflation’ has been deployed to refer to the post-crisis past decade, which has been characterized by lingering recovery from the global crisis, despite ultra-low rates and quantitative easing.

During the global crisis, China accounted for much of global growth prospects, while the US, Europe, and Japan coped with the Great Recession. Even today, China continues to drive a disproportionately large share of global growth.

However, as deleveraging has now started in the mainland, China can no longer raise future optimism single-handedly.  

From debt to deleveraging

Today, China has its debt challenge. It evolved in just a decade. And while it can still be supported by catch-up growth and productivity, it is untenable over time.

In 2007, China’s total debt was 136 percent, of which most was private non-financial debt (115%). By 2015, Chinese debt had soared to 221 percent of GDP, of which most could be attributed to private debt (205%), as opposed to central government debt (16%).

China could continue to take debt, which would eventually end in a crisis, as evidenced by many advanced economies. Instead, since late 2016, the central bank has adopted a tighter monetary stance. Indeed, recent data on the decline of total social financing and broad money supply suggests that deleveraging has begun.

China’s debt burden is the result of the 2009 stimulus package, which contributed to infrastructure but unleashed huge liquidity and speculation, and the 2016 credit expansion, which heated property markets, despite tougher regulation.