Depending on the specific measures taken, we could see a controlled deleveraging or a clumsy, heavyhanded attempt to put the brakes on. The prospect of a highly leveraged Chinese economy facing a sudden liquidity shortage is terrifying for both economic and political reasons. With increasing unemployment for college graduates and a significant deterioration across other macro factors, the only real driver has been record lending by Chinese central banks. Despite all the cosmetic changes, China remains a centrally controlled economy and it is a very tough challenge to manage liquidity flows across the financial system without blowing up the current structure.
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Cornelius in Rock, Chinese Economy, Hard Place — zero hedge I’ve mentioned that a difference between the US and China is that while both governments are capable of magically creating money, only China has the power to force banks to lend (so far). Consider the unwind if such forced leverage ends badly. Such an unwind is far from certain thanks to huge foreign currency reserves, but leverage increases the costs of every misstep. |
