China has a choice between the ‘grey rhino’ risk of rising debt or the ‘black swan’ threat of an economic slowdown
- Beijing changes course on macroeconomic policy to cope with slowdown pressure amid the trade war with the United States
- China’s renewed easing of credit conditions on Friday is set to amplify the country’s debt problem
The rapid escalation of the China-US trade war in recent weeks has left Beijing’s policymakers with the choice of two evils: either enlarge the obvious “grey rhino” risk of rising debt or face the unpredictable “black swan” threat of a further economic slowdown, analysts said.
The central government has been trying to keep both at bay for the past two years, with President Xi Jinping saying in January that China must stay on high alert for “black swan” events while preventing “grey rhino” risks from getting out of control.
But Beijing’s policy balancing act might have come to an end last week when the People’s Bank of China announced that it would pump an estimated US$126 billion in additional liquidity into the banking system to boost credit.
By cutting the required amount of reserves a lender must hold at the central bank – on top of a decision to allow local governments to borrow more to support infrastructure investment – Beijing has sent a clear message that it is drawing on pages from its old fiscal and monetary stimulus playbook at the cost of its debt-reduction campaign, which it pursued under Xi before US President Donald Trump began the trade war 14 months ago.
“There’s a trade-off between deleveraging and economic stabilisation. You can only pick one at the moment, rather than choose both,” said Larry Hu, chief China economist of Macquarie Capital.