The Chinese economy appears to be stuck in an uncomfortable and unsustainable quasi-equilibrium in which growth is just about stopped from falling further through continued central-bank and financial regulator-promoted credit growth and selective fiscal stimulus, funded by local governments borrowing and debt issuance by SOEs and other large corporates. This interruption of the decline in China’s growth rate is achieved through means that increase the likelihood of an eventual larger decline in growth, commonly referred to a “hard landing”. Adding debt to the already over-leveraged balance sheets of local governments and non-financial corporates and adding productive capacity in sectors already plagued by excess capacity are the wrong kind of counter cyclical demand stimulus.
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