Don't take your eye off the big picture

CHINA FINANCIAL - In Brief 25 Aug 2015 by Michael Pettis

With all this excitement in the market it is important to remember the big picture: 1. GDP growth will continue to slow, either steadily, by 100-150 bps a year through the rest of the decade, or disruptively, with growth stabilizing at 6-7% for the next two or three years, and then, once China hits debt capacity limits, dropping very rapidly. 2. Debt is growing at a pace that is clearly unsustainable. This is why the financial sector is so badly squeezed and why Beijing’s room for maneuver is so limited. 3. “What will happen next?” is a political question, not an economic one, and not only is it a question that very few people can answer with any confidence, but anyone who can won’t be telling you or me. The past few weeks may have strengthened or weakened the president’s hand in implementing the necessary reforms against the opposition of the so-called vested interests, but we will only know over the next few months as Beijing moves forward more or less aggressively than expected. I have said this many times already, but I don’t plan to stop repeating it: Credibility is key. For now, credibility, or lack of credibility, will show up in the capital outflow numbers.

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