Beijing’s tepid response to the unfolding property crash is baffling
China’s political and economic leadership are thought to have a keen sense of history, but Beijing’s tepid response to the unfolding property crash that’s strangling the country’s growth and spreading deflation is baffling.
Morgan Stanley economists are now forecasting nominal GDP growth of just 3.9% this year and next. For comparison, nominal U.S. GDP growth is currently running at an annualized pace of around 5.5%. True, foreign investors have continued to participate in the country’s bond market rally. But the overall message is that investors are reluctant to invest in China until there’s a clear path to economic recovery.The property sector is pivotal to the crisis. Its implosion is damaging growth, financial stability and household wealth. And the deflation it’s fueling is affecting corporate profitability and investment, while increasing real debt burdens.
A flood of stimulus could also weaken the exchange rate so much that capital flight out of the country accelerates. And deep rate cuts would wipe out banks’ already slender interest margins. Finally, China’s leaders have simply shown themselves to be more cautious than cavalier.By failing to follow its global peers in aggressively cutting rates, the PBOC has helped lift the yuan to its strongest level in over a year. The last thing China’s sluggish economy needs is a buoyant exchange rate.
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