Red-ink China; Some ways in which the Chinese economy might evolve

China scared economists when it was released that their debt has risen to over $500 billion. Not all of the "new debt" was new, some represented a move to local currency loans which helps reduce foreign-currency risk. Total debt in China is at 282% of GDP. This article discusses what the debt in China means for China and how they should adjust their policies. 

Eventually such high debt will need to be deleveraged, which will decrease demand growth and slow GDP growth. But, with monetary and fiscal policy like encouraging consumption and investing among “non-corporates”, and pushing loans on households. These changes are likely to begin QE and Zero interest rates, which would decrease the yuan. However the author of the article believes that this wouldn’t be a negative, since history has made it apparent that “demand-deficient, deleveraging economies depreciate their currencies and rely on external demand to support growth”, which means China would look to other countries to help stimulate their economy. However, the large trade surplus in China means that even with a large depreciation, demand wouldn’t increase by much, since importing would be more expensive.

However if China does not depreciate the yuan, the they do not “pressure deleveraging corporations”, or “squeeze Chinese consumers” since the value of the yuan wouldn't drop. If they don’t depreciate they will be forced to impose strict controls on capital, trade and investment, to maintain their reserves but this would equally hurt their GDP and international relationships. The Chinese government could also choose to provide aid with private debts.

China stands on unsure footing. There doesn’t seem to be one position or policy they could take that would end up being a positive for the country all across the spectrum. The author of this article argues that it is possible they find a policy “sweet spot”, but the likelihood that any of the policy options goes off without a hitch is slim to none. China will have to give in, in at least one area to help improve their economy in the long run. I believe they should just support the depreciation of the yuan, even if it will hurt their pride it seems like the far easier option than taking on citizen debt, corporate debt or imposing controls on capital, investment or trade. 

Red-ink China