Sudden Financial Meltdown is less likely.

The Chinese government has the situation under control and will do whatever it takes to keep it under control — that’s in essence what Premier Li Keqiang said today in a speech at the World Economic Forum in the Chinese city of Dalian.

“We are fully capable of achieving the main economic targets for the full year,” Li said. The mandated growth rate this year is 6.5%.

“Currently, China also faces many difficulties and challenges, but we are fully prepared,” he said, according to Reuters. He said this because everyone from the IMF and the New York Fed on down has been pointing at and fretting about the debt powder keg that China keeps filling with ever more volatile compounds.

“There are indeed some risks in the financial sector, but we are able to uphold the bottom line of no systemic risks,” he said. “We are fully capable of preventing various risks and making sure economic operations will be within a reasonable range.”

So the powder keg isn’t going to blow up. As ever more debt is added, the government is pursuing the shift to a consumer-driven economy, while trying to tamp down on excess and outdated capacity in some select industries such as steel and coal. These cuts, Li said, would continue.

“No development is the biggest risk for China,” he said, so China wants to “sustain medium- to high-speed economic growth over the long term.” But given the size of China’s economy, it “will not be easy.” In other words, come hell or high water, credit creation will continue in order to maintain this mandated growth.

So when will this powder keg blow up?

It might not blow up; China might be able to prevent that kind of event, and it is less likely that China will melt down financially despite its terrific credit expansion, and there are no signs of an immediate crisis. But China, like Japan in the 1980s, is suffering from a “delusion” about how to fix its economic problems.

That’s what Richard Jerram, chief economist at the Bank of Singapore, the private banking arm of the Singapore-listed Oversea-Chinese Banking Corporation Limited Bank (OCBC), said after a press conference on Monday in Hong Kong, according to the Nikkei.

By avoiding real economic reform, and by continuing with this credit creation to paper over all problems, Jerram said, China will likely face long-term economic stagnation, similar to what Japan experienced after its 1980s bubble. The Nikkei:

Instead of pushing reforms to transform its economy to consumption-based growth, he [Jerram] expected that the nation would continue to rely on a government policy-supported growth model with credit continually expanding at “whatever number necessary to maintain the acceptable growth rate at 6-7%.”

He pointed out that growth fueled by cheap credit is the opposite of how China should approach its problems. “What you have to do is clear,” he said. “You have to choke cheap credits to inefficient companies.”

“You need a very broad range of reform if you are going to fix this,” Jerram said, but “we haven’t seen any signs of that scale of reform happening.” Real reform, Jerram said, would be politically and socially “very difficult.”

But dodging painful reform and papering over problems with more debt will likely result in a long-term economic stagnation, as it did in Japan. The Nikkei:

China’s current delusion resembles what he saw in Tokyo in the late 1980s when the nation was going through an economic bubble, which eventually burst in the 1990s. Most of Japan’s growing credits were held domestically, just like today’s credits in China, he said, and this is another reason why he believed that what awaits China is most likely long-lasting economic stagnation.

Economic reform will likely remain a focus of the Chinese government, but there are so many conflicting interests in the economy that Jerram sees the government’s willingness to tackle real reform as low. “I don’t know if it’s really possible,” he said. Even if President Xi Jinping were given another 15 years, “I still don’t know if you can fix it.”

The difficulties for China to reform will even be greater, Jerram said, because the role of government in the economy is much larger and China is poorer than Japan was in the 1990s.

This theory – a long hard stagnation as a result of the debt boom rather than a sudden debt meltdown – is not universally shared. For example, the New York Fed was somewhat less sanguine about the chances of China being able to avoid a “Financial Crisis,” though it also thought that the government had some capacity “to absorb potential losses from a financial disruption.”

And so, if the government uses this capacity every time to dodge the big event without really solving the underlying economic problems, Jerram’s long stagnation scenario would then kick in.

But the data points the New York Fed found in its China study can give you the willies. Read… Debt Boom in China Could Lead to “Financial Crisis,” But Maybe Not Yet: New York Fed

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