China rebalances for a sustainable future

After many false starts, there is now evidence that the long-awaited, and much desired, Chinese rebalancing – where consumption reels in investment as the engine of growth – has finally started.

Unlike some other analysts, I am not concerned about deflation persisting for long unless the People's Banks of China cuts interest rates much more sharply than any of us expect. I know this may sound strange – most analysts believe that cutting interest rates will actually reignite CPI inflation – but remember that the relationship between inflation and interest rates in China is, as I have discussed many times before, not at all like the relationship between the two in the US. It works in the opposite way because of the very different structure of Chinese debt and consumption.

Hard landing?

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