CHINA might choose to once again kick the can down the road by further delaying essential economic reforms, but this is not my base case for the rest of this year and into 2017.
Xi Jinping and his supporters are now in the position to accelerate reforms, and so they may well choose this moment to push ahead with reforms that will drive growth a great deal lower. We essentially haven’t seen anything yet, despite official GDP growth already having fallen to a 25-year low. China’s reformers know that the alternative is another delay that will only worsen bad debt and environmental problems.
On the bad debt side of things, making things worse doesn’t seem the sensible option given last week’s warning by the International Monetary Fund about how China’s $2.9 trillion shadow banking sector could pose a systemic risk.
Might the foot have already been applied to the accelerator pedal? If total social financing (TSF) for July is anything to go by, then the answer is yes. In July, TSF, which is a measure of both shadow private and lending and official lending via the state-owned banks, grew by $82 billion over $241 billion, according to Business Insider UK. TSF growth remains the single-best measure of the pace of economic reforms.
Could this also be the trigger or a global unwinding of over inflated equity markets, accompanied by oil at below $30/bbl again with more weakness in other commodities?
It is scenario that needs to be evaluated. But even if we get away with it again this time, one thing is beyond doubt: It is all only a question of time before one or more of the global imbalances start to unravel.