June 20, 2018

HMM: Trade Fight With U.S. Complicates China’s Campaign to Contain Debt. “Recent economic expansion seems to be ebbing, triggering calls for Beijing to reopen credit spigot before trade conflict further dents growth.”

From behind the WSJ paywall:

The unusually-large liquidity injection surprised market participants, helping drive down the yuan’s value against the dollar to its weakest level in five months, at 6.4743 per dollar. The benchmark Shanghai Composite stock index plunged 3.8% Tuesday, dipping below 3,000, a psychologically-important level for investors and hitting its lowest mark in two years.

To fend off an economic slowdown, some officials in the State Council, China’s cabinet, are urging more aggressive loosening measures to boost lending and spur growth, such as reducing the portion of deposits banks are required to hold in reserve. Others, notably those at the central bank and other financial regulators, want to stay the course of debt control.

Companies ranging from property developers, local-government financing vehicles to manufacturers recently have missed payments on either bank loans or bonds, even though overall default rates remain low.

“Financial deleveraging is now trickling down to the real economy,” said Sheng Songcheng, a senior adviser at China’s central bank. “All those efforts would go to waste if monetary policy gets loosened now.”

“If the trade war gets worse from here, China’s policy makers will be forced into easing,” said Zhang Zhiwei, Deutsche Bank’s chief China economist. “That will probably delay the current policy agenda of deleveraging and containing financial risks.”

We have our own debt issues, but when free countries hit bad economic times, oftentimes the people vote the bastards out. When dictatorships hit bad economic times, sometimes the dictators find themselves with their backs against the wall.

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