Trump’s trade war is forcing Beijing to withdraw from its own anti-debt battle

Years of major investment projects have helped stimulate the double-digit growth of China’s gross domestic product, turning the country into the world’s second largest economy.

China is moving away from the battle to pare the huge debt levels, while looking for ways to support the faltering economy.

A Citi report on Monday said that this trend could prove “disastrous” for the country’s economy.

But the price to pay was a mountain of debt that had to be knocked down while the authorities reshaped growth towards a more sustainable model.

The plan was to base the economy on increasing the purchasing power of the growing Chinese middle class rather than outdated infrastructure investments.

The trade war is affecting China’s economic growth and forcing a rethink of debt reduction – known as deleveraging – while authorities seek ways to squeeze the economy to offset the results of US President Donald Trump’s rates on Chinese exports.

Economists increasingly see future rates as applicable to all shipments from China to the United States, which means that Beijing is bound to further ease the financial taps.

This has already been seen in the form of cuts to mandatory reserve ratios for banks, which set the amount of funds they need to keep close at hand. The recent moves mean that banks have more money to lend, stimulating the economy with more debt.

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A Citi report on Monday estimates that the break in leverage reduction will increase China’s debt / GDP ratio by 12.3 percentage points to 274.5 percent by the end of this year, reversing a slight decline in 2017.

“The markets are right, in our opinion, to feel more concerned about the sustainability of Chinese debt and the increase in financial risks,” said Citi.

Andrew Collier, CEO of Orient Capital Research in Hong Kong, said that there is likely to be a “loss” in the Chinese debt economy, meaning that those in need of credit will find a way to get it through the banking system shadow.

“So I am not optimistic that there will be significant deleveraging in 2019 and this means that the current level of debt should remain at current levels or even rise, which could be disastrous,” Collier said at a conference on 10 October.

Source: CNBC