Markets need to recognise that the country is not reverting to its old economic and financial playbook
The Chinese authorities have announced over recent weeks a series of small monetary, fiscal, and regulatory measures to boost the economy and markets. These measures have thus far been perceived correctly as piecemeal and lacking conviction. Yet many still believe they will eventually accumulate into an impactful critical mass. There are problems, however, with this view.
The external trade and investment outlook is equally problematic. There is a growing realisation that the economic and financial decoupling between China and the US is likely to continue. This could reduce the contribution of exports to growth, disrupt the importation of crucial industrial inputs, undermine foreign direct investment, and make portfolio investors even more skittish.
It is likely authorities will continue to only tinker with small stimulus measures while seeking to communicate better their intention to accelerate the transition to new growth sectors . This revamped growth model takes time and involves creative destruction, especially in the short term. Additionally, the authorities will need to consider more forceful debt restructuring measures that, initially, also detract from growth.
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