Chinese Credit Stimulus: Yesterday’s Solution, Not Today’s

In the teeth of the 2008-09 global financial crisis, China launched a massive investment-led stimulus effort, funded by banking system credit, leading the globe toward recovery. Now, facing a global economic downturn of similar or greater magnitude from the Covid-19 outbreak, observers are asking whether China will do it again. This time, Beijing does not have the option.

Chinese policy-makers are limited by an impaired financial system unable to generate anywhere close to the same volume of credit as in the past. Most of the credit that can be disbursed will just pay interest on the debt incurred after 2008, rather than fund anything new. Past reform delays leave China facing an ugly choice: reduce the magnitude of tomorrow’s debt crisis by acting less heroically with stimulus today, or pull out all the stops to prop up current demand by walking further into a debt trap at home and still having no certainty of stabilizing economic conditions. Even Beijing’s “bazooka” options to boost the economy face difficulties supporting an impaired financial system and indebted state-owned and local government firms.

Posted March 23, 2020
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