OECD says that China's policy stimulus may worsen economic distortions

Author: Justin Low | Category: News

OECD warns that China's stimulus measures could worsen structural distortions over the medium-term

In its latest survey on the Chinese economy, OECD notes that China is stepping up stimulus measures to bolster its economy this year and next. But such measures may undermine the country's drive to control debt and worsen structural distortions moving forward.

The survey touches on infrastructure stimulus leading to a build-up of imbalances and potentially capital misallocation, resulting in weaker growth in the medium-term. Adding that overall stimulus risks increasing corporate sector indebtedness and more generally, reversing progress in deleveraging.

This all boils down to the same debate I've highlighted before upon the release of Chinese credit data. It essentially boils down to how much Chinese authorities are willing to forgo in their battle to fend off systemic and financial risks against pushing efforts to stimulate economic growth in testing times.

And the ensuing battle is clearly depicted in China's M2 money supply growth data, which is seen bottoming out around +8.0% y/y in 2018. This highlights that China is trying to shore up economic growth in the immediate picture via scaling back on deleveraging efforts but in the grand scale of things, this could come back and hurt them through other ways i.e. rising corporate debt, shadow banking risks, etc.


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