In many ways, China follows the same deformed model of capitalism as most western countries, only more so, taking on ever increasing levels of debt to generate less and less growth.
GROWING FINANCIAL FRAGILITY
The result is growing financial fragility. Like its more advanced rivals from the US to Japan, China has created a financial system in constant need of government support and stimulus.
Policymakers keep economic growth going at any cost, and repeatedly back down from tightening policy at the slightest hint of economic or financial trouble.
Whenever a company of any consequence gets into difficulty, authorities have stepped in with a bailout. That’s especially true in China, where in recent years default rates have run far below the very low global averages.
Conditioned to expect the government to intervene in time to stave off any crisis, global investors have not pulled money out of China, yet. But if Xi were to depart from the past, by purging debts and letting defaults spike, it could trigger a nervous breakdown in the world’s financial system.
What we are likely to witness over the coming months is an epic clash between a leader with supreme powers determined to change the course of his nation, and the economic constraints imposed by gargantuan debts.
For now, the markets are still betting that the stakes are too high, even for a leader as powerful as Xi, to wean China suddenly off a debt-fuelled form of capitalism the world has been practising for years.
Ruchir Sharma is Chief Global Strategist at Morgan Stanley Investment Management and author of The Ten Rules of Successful Nations.
Source: Channel News Asia