FAST FIVE: "The Comments Are Highly Important": China's Xi Reportedly Indicated Desire To Avoid Strong Stimulus
This should hardly come as a shock: after all, according to the IIF, China's total debt/GDP as of March 31, 2020 is now a record 317%, the highest in history, and up 17% in just the past quarter and nearly double what it was in 2008, suggesting the country is basically out of room to layer on even more debt leaving far less space for a major new fiscal stimulus push.
While on the surface this is a good thing, as it tends to reduce distortions, it also boosts the likelihood of a lower level of reported GDP growth.
If GDP growth in 2020 is 3%, then the level of income will be 1.95 times that in 2010.
In fact, according to Goldman calculations, the effective deficit which is a more relevant indicator to measure the on-budget fiscal stance by taking financing through drawdown of fiscal deposits and transfers from other fiscal accounts into account, will increase even more, by 1.6pp to around 6.5% this year, according to the budget report released on the MOF website over the weekend.
In other words, whereas it was China that managed to pull the world out of the depression triggered by the global financial crisis with an unprecedented surge in debt creation (something we discussed back in 2013), this time around – whether due to political reasons, or purely based on balance sheet limitations – it will be up to every developed and emerging nation to restore its historical growth rate.