Bloomberg: Can China Really Rein in Credit?

China's regulators and central bankers are trying to control the country’s debt and reduce associated risks, and in turn this may reduce economic growth. explains Michael Pettis, finance professor, in an opinion essay for Bloomberg: “there's a big difference between China's sustainable growth rate, based on rising demand driven by household consumption and productive investment, and its actual GDP growth rate, which is boosted by massive lending to fund investment projects that are driven by the need to generate economic activity and employment.” Pettis offers a reminder that GDP measures economic activity rather than actual value of goods and services. China’s economy is a mixture of free market and government controls that can overstate value creation. Debt has driven economic growth beyond productive capacity, an artificial boost, according to Pettis. For the Chinese, slower growth combined with less debt, rebalancing and higher wages would not hurt citizens – but that requires a transfer of wealth from local governments to households. Pettis concludes that less debt with lower rates of growth would be healthier for China in the long run. – YaleGlobal