According to Bakkum, following the extensive stimulus measures that kept China safe during the 2008 credit crisis a growth decline was inevitable.
While the need to rebalance the economy from being dependent on investment and exports to one which has a larger domestic consumption element is widely recognised, the Chinese authorities’ willingness to do so in the short term is less clear, Bakkum said.
“The credit-driven investment model, in which the primacy for the most important economic decisions lies with the government, remained intact,” he said. “The sectors with the largest excess capacity were rarely addressed, as local governments had major economic interests in those sectors.”
“It gradually became clear that the economy only became more dependent on credit,” he continued. “So the most urgent measure, reducing the debt level in the economy, came to nothing. Since the massive stimulus package in 2008, the debt ratio has increased by 85 percentage points. This is unprecedented anywhere in the world, and leads to a significant risk of a credit crunch.”
The recent correction on the Shanghai stock exchange and devaluation of the renminbi has sapped investor confidence in the Chinese government, Bakkum said, and for the first time in decades people have begun to realise the government in Beijing no longer has complete control over the economy.
