1/7
There is a lot of confusion over how to resolve local-government debt. Some analysts, for example, are arguing that "as the demand for financing has increased, it is imperative to reduce the interest rate on urban investment financing."
yicaiglobal.com
There is a lot of confusion over how to resolve local-government debt. Some analysts, for example, are arguing that "as the demand for financing has increased, it is imperative to reduce the interest rate on urban investment financing."
yicaiglobal.com
2/7
But lowering the borrowing cost for local governments will reduce the profitability of the lending banks, many of whom are effectively โ if not technically โ insolvent. Local governments are already borrowing in order to shore up bank capital.
But lowering the borrowing cost for local governments will reduce the profitability of the lending banks, many of whom are effectively โ if not technically โ insolvent. Local governments are already borrowing in order to shore up bank capital.
3/7
This means that whatever benefits local governments receive from lower borrowing costs will be matched by the higher cost of recapitalizing the banks.
Of course banks could retain their profitability if the PBoC lowered the deposit rate, but in that case...
This means that whatever benefits local governments receive from lower borrowing costs will be matched by the higher cost of recapitalizing the banks.
Of course banks could retain their profitability if the PBoC lowered the deposit rate, but in that case...
4/7
the lower borrowing costs for local governments would be subsidized by the household sector, and this would reduce domestic demand, requiring more debt on the part of local governments to achieve GDP growth targets.
the lower borrowing costs for local governments would be subsidized by the household sector, and this would reduce domestic demand, requiring more debt on the part of local governments to achieve GDP growth targets.
5/7
The point is that rising debt is a structural problem in China, and is the result of GDP growth targets that exceed the real underlying growth of the economy. Incremental policies aimed at reducing one form of the debt problem will simply increase other forms.
The point is that rising debt is a structural problem in China, and is the result of GDP growth targets that exceed the real underlying growth of the economy. Incremental policies aimed at reducing one form of the debt problem will simply increase other forms.
6/7
The only way to "resolve" the debt problem is either to reduce GDP growth targets sharply (probably to below 2-3%), or to rebalance demand through major transfers of income and wealth from local governments to households.
The only way to "resolve" the debt problem is either to reduce GDP growth targets sharply (probably to below 2-3%), or to rebalance demand through major transfers of income and wealth from local governments to households.
7/7
Because the latter is politically so hard to pull off, the most likely outcome is a sharp decline in GDP growth as Beijing finally resolves to get nonproductive investment and debt under control.
Because the latter is politically so hard to pull off, the most likely outcome is a sharp decline in GDP growth as Beijing finally resolves to get nonproductive investment and debt under control.
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