China’s Bad Dream

Since his first address as China’s president last year, Xi Jinping has been espousing his goal of advancing the so-called Chinese Dream. But the imperative of addressing the unprecedented amount of debt that China has accumulated in recent years is testing Xi’s resolve – and his government is blinking.

LONDON – Since his first address as China’s president last year, Xi Jinping has been espousing the so-called “Chinese Dream” of national rejuvenation and individual self-improvement. But the imperative of addressing the unprecedented amount of debt that China has accumulated in recent years is testing Xi’s resolve – and his government is blinking.

The Chinese government’s uncertain ability – or willingness – to rein in debt is apparent in its contradictory commitment to implement major structural reforms while maintaining 7.5% annual GDP growth. Given that China owes much of its recent growth to debt-financed investment – often in projects like infrastructure and housing, meant to support the Chinese Dream – any effort to get credit growth under control is likely to cause a hard landing. This prospect is already prompting the authorities to delay critical reforms.

To be sure, China’s debt/GDP ratio, reaching 250% this month, remains significantly lower than that of most developed economies. The problem is that China’s stock of private credit would normally be associated with a per capita GDP of around $25,000 – almost four times the country’s current level.

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