Until recently, the conventional wisdom was that China’s contribution to global reflation would be increasingly accompanied by those of the US and Europe. Yet, the realities may look grimmer than anticipated.

Usually, the term ‘reflation’ is used to describe the first phase of economic recovery after a period of contraction. More recently, ‘global reflation’ has been deployed to refer to the post-crisis past decade, which has been characterized by lingering recovery from the global crisis, despite ultra-low rates and quantitative easing.

During the global crisis, China accounted for much of global growth prospects, while the US, Europe and Japan coped with the Great Recession. Even today, China continues to drive a disproportionately large share of global growth.

However, as deleveraging has now started in the mainland, China can no longer raise future optimism single-handedly.  

From debt to deleveraging

Today, China has its debt challenge. It evolved in just a decade. And while it can still be supported by catch-up growth and productivity, it is untenable over time.

In 2007, China’s total debt was 136 percent, of which most was private non-financial debt (115%). By 2015, Chinese debt had soared to 221 percent of GDP, of which most could be attributed to private debt (205%), as opposed to central government debt (16%).

China could continue to take debt, which would eventually end in a crisis, as evidenced by many advanced economies. Instead, since late 2016, the central bank has adopted a tighter monetary stance. Indeed, recent data on the decline of total social financing and broad money supply suggests that deleveraging has begun.

China’s debt burden is the result of the 2009 stimulus package, which contributed to infrastructure but unleashed huge liquidity and speculation, and the 2016 credit expansion, which heated property markets, despite tougher regulation.

Setting aside excessive leverage, both surges have had beneficial impacts internationally. The 2009 stimulus ensured global growth prospects and probably spared the world from a global depression. The 2016 credit surge allowed China to stabilize economy and markets, which, in turn, supported lingering recovery globally.

The big question is, if China accounts for much of recent global reflation, can the latter be sustained as deleveraging accelerates in the mainland?

Dreams and realities of global reflation

Not so long ago, there were still great hopes about sustained ‘global reflation.’ Last fall, the Trump triumph in the US elections unleashed great expectations about the coming of fiscal expansion, tax reforms, and deregulation. As a result, markets soared, which lifted confidence internationally.  Thereafter, European recovery has been faster than in years, thanks to the French election, expectations of a ‘soft Brexit’, and Chancellor Merkel’s anticipated victory in German election later in fall.

Today, half a year later, it is clear that Trump’s fiscal expansion will move ahead far slower than anticipated and the administration’s credibility, perhaps even its future, is likely to be suppressed by the impending Mueller investigation, while the Federal Reserve is planning a third date hike in the fall.

In Europe, rising confidence ignores the fact that current growth rates remain predicated on ultra-low rates and tens of billions of euros for quantitative easing on a monthly basis. It may under-estimate the adverse impact of the lingering Brexit story, the challenges associated with French President Macron’s proposed labor reforms, as well as the potential implications of the struggling two mid-sized Italian banks. It is a recovery that, at least for now, relies on artificial lungs.

In the past decade, much of global growth prospects and recent global reflation can be attributed to China. In the next few years, China will continue to support global economic integration through the One Road and One Belt program and many other initiatives. But it can no longer fuel global growth and reflation on its own.

So the question is, have advanced economies really surpassed secular stagnation and are they today willing, but also able to do their share for global growth prospects?   （Shanghai Daily，July 3, 2017）

Source of documents： Shanghai Daily，July 3, 2017