Opinion: China Needs to Ease Up on Deleveraging
It is reasonable for China’s domestic debt to rise in the post-crisis era. It’s also sustainable. China’s savings rate stands about 40%, twice the world’s average.
Because China’s financial system is — and will remain — dominated by debt-based financing for a time, transforming savings into investment will inevitably result in more debt.
The ideal way to cut China’s domestic debt burden — which has grown drastically since the financial crisis — is to improve income distribution, boost household spending and reduce savings. But boosting consumer spending takes time, so the economy must continue to rely on investment to drive aggregate demand for a while yet. China’s fixed-asset investment is primarily composed of three parts. Infrastructure investment and real estate investment each account for about a quarter, and manufacturing investment accounts for about a third. Among them, manufacturing investment is production-oriented. In contrast, infrastructure and real estate investment can be categorized as consumption-oriented investments.
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