We Should Be Nervous If China's Leaders Actually Believe What They're Saying

Oppenheimer Funds

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China’s economy is slowing.

Meanwhile, rising local government debt and the ballooning shadow banking sector has experts worried that a sincere effort to deleverage could trigger a hard economic landing.

People that are bullish on China often say that Beijing is in control of the slowdown. This argument has been applied to policymakers’ handling China’s so-called “ghost cities,” property price bubble, and mini-credit crunches in December and in June of last year.

However, it is unclear just how much control policymakers actually have over the problems popping up across the Chinese economy.

“I’m worried that Chinese leaders actually believe it when they say everything is under control,” said Patrick Chovanec, chief strategist at Silvercrest Asset Management. “The clock is fast running out on China’s tactic of using runaway credit to fuel investment-led growth.”

“At best China faces a growth squeeze from a mounting burden of bad debt, at worse that bad debt will blow up in its face. Either way, China faces a wrenching economic adjustment. If China’s leaders recognise not just the direction but also the urgency of change, they have some hope of getting to the other side. If they kid themselves into complacency, they are courting disaster.”

China’s upcoming National People’s Congress will give us more details on what policymakers are most focused on.

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