China’s excess money
China’s post 2002 growth, and particularly that which occurred from 2009 onwards, involved the creation of a massively outsized financial system. This caused a record breaking debt to GDP ratio which may turn into a compound-interest-driven Debt Trap similar to that which many LATAM countries experienced in the 1980s. Indeed, domestic debts may be over 300% of GDP and nominal GDP growth is decreasing towards zero, with the result that China may need to resort to zero interest rates. Moreover, the massive increase in credit has created an equally massive pool of domestic liquidity. If this pool of liquidity were to be utilized (via the equity market) into repaying their debt burden, this would represent the best possible outcome. However, if the excess money balances held by the private sector were to leave the RMB then an embarrassing decrease in the currency would occur.
Blog by Sophie, for full article contact Andrew