By opting for surprisingly small measures, the Communist Party leadership is accepting an over-leveraged Chinese economy that cannot afford another round of debt-financed stimulus.
Economist Min Zhu, speaking at a World Economic Forum panel in China in late June, was among the first to hint at China’s underwhelming post-COVID policy stimulus. Zhu, a former deputy managing director of the International Monetary Fund, as well as a former deputy governor of the People’s Bank of China , is no casual observer of the Chinese economy and its role in the world. He is also one of my oldest and wisest friends in China, and I have learned to take his views very seriously.
For a country that has long prided itself on implementing proactive policies to pre-empt economic pressures, the latest stimulus measures are surprisingly reactive. The question is why. Zhu, in his remarks during the WEF panel, pointed to China’s debt problem. Researchers at the International Monetary Fund have identified two main reasons for this debt surge: increased leverage of debt-intensive, low-return state-owned enterprises , and a higher concentration of public indebtedness in local-government financing vehicles.
Mindful of this, the Chinese government has made yet another push for consumer-led rebalancing, with a 20-point plan released in late July. This should be music to my ears, given that I have written two books on the topic and for years have taught a course about it at Yale. But a careful look at the plan leaves me cold.
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