What a China U-Turn Would Mean for Global Growth

Beijing is fretting that a recent lending boom is exacerbating problems in an already overloaded financial system

Just as quickly as it materialized, China’s nascent recovery is being shrouded in an uncertain gloom from Beijing.
Signs of stabilization have appeared over the past couple of months, as vigor in China’s property market has spread to other areas such as construction spending and industrial activity. 
The latest consumer price data out Tuesday shows inflation has steadied well above 2%. And producer prices in April fell at their slowest pace in over a year, easing fears of outright deflation. 
The problem with this recovery, however, is that it has been driven by debt, an unsustainable solution for an economy already choking on the stuff.
It was perhaps inevitable then, that as soon as activity picked up, Beijing would again fret that it was exacerbating problems in an already overloaded financial system. Much of the increased lending in recent quarters has gone to property in overheated big cities, prompting official clampdowns on property activity.

The other bubble of late in the commodities futures market, is deflating quickly as regulators place borrowing curbs on investors using cheap debt to bet on things like rebar and soybeans. Global commodity producers pinning their hopes on China yet again look set for disappointment.

A lengthy interview published Monday in the official mouthpiece People’s Daily with an unnamed high official gave voice to these concerns. It noted the diminishing returns on the use of monetary policy and increased lending to steady the economy.

It called for less debt, more reforms and culling of overcapacity, the kind of moves likely to cause growth to slow before it pays dividends in a healthier long-term economy. The person cited in the article said deleveraging should happen from debt growing slower, not from gross domestic product growing faster.

The public airing of such views in the least shows there are major disagreements among top officials. Or it could signal that an antidebt, reformist faction of the government is again on top, and the opening of the lending spigots will now reverse.

If the latter is the case, then before too long, talk of slowing China will again be a source of market trouble.

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