China's Rebalacing Scenarios

Michael Pettis outlines several rebalancing scenarios in China’s rebalancing timetable. He drives home the point that credit growth and GDP growth are linked and short of taking significant steps to reduce debt, it is very difficult to get out of a debt.
What matters is the associated growth in credit. If growth next year of 7% were achieved with 18% growth in credit, things would actually be getting worse, not better. On the other hand if China grew next year by 5%, with credit growing at “only” 8%, this would represent a significant improvement in China’s medium- and long-term growth prospects. This is something that a lot of economists seem to have real trouble in understanding. There is no “good” level of economic growth independent of the associated growth in credit.

Ultimately, and to repeat Conclusion 5 above, Beijing must continuously choose between a rising debt burden, rising unemployment, or rising transfers of wealth from the state sector. All of its policy options boil down to one or more of these three. So far it has mostly chosen the first, but this can only go on until the country reaches debt capacity limits.
One point he makes is that Beijing has credibility in its ability to prevent a debt crisis:
...that for those who believe (and I include myself in this group) that the structure of Chinese financial markets and Beijing’s high credibility give it protection from the risk of debt crisis...
but he also notes that Beijing does not have the power to abolish the laws of economics:
In fact the real cost of excessive debt levels is what finance specialists call “financial distress” costs, and I have explained elsewhere how debt can become excessive. China is already experiencing financial distress costs and as debt rises, these costs will make it harder and harder for China to achieve target growth rates except at the expense of even more debt, so that rising debt automatically means lower growth than otherwise.
The area where I see this eventually having an impact in on the area Beijing increasingly cannot control: the currency.

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