The Connection Between the Congress of Vienna and the Present Day Scenario
In the aftermath of the 2013/14 credit tightening, China's decision to curb credit expansion had significant economic and political consequences, both domestically and on the global market.
Economic Consequences
The move was aimed at reducing financial risks from overleveraging, particularly in corporate and real estate sectors. This led to reduced investment and slower growth in traditional industries, contributing to signs of economic slowdown and deflationary pressures reminiscent of a "balance-sheet recession" similar to Japan in the 1990s.
The crackdown on credit exposed vulnerabilities, causing a collapse in real estate investment and asset bubbles. Weaker consumer demand and labor market challenges followed, with stagnant wages and youth unemployment rising sharply, weakening domestic consumption and putting further pressure on economic growth.
In response, China used monetary policy tools such as interest rate cuts and liquidity injections. Later stimulus involved increased government borrowing and local government special bonds to support investment, especially focusing on shifting growth towards domestic consumption and services.
Political Consequences
The Chinese Communist Party (CCP) asserted tighter control over financial institutions to manage debt risks. The government also sought to balance maintaining growth with preventing systemic financial risks.
As China adjusted credit, its lending overseas under initiatives like the Belt and Road slowed or shifted focus, raising concerns about debt sustainability in partner countries and resulting geopolitical risk due to debt and resource allocation issues.
Impact on the Global Market by 2021
China's credit tightening slowed its export-driven growth model, affecting commodity demand globally. This contributed to volatility in global markets dependent on Chinese demand for raw materials and manufactured goods.
The reduction in credit exposed vulnerabilities in Chinese banks and corporations, raising concerns about contagion risks in international financial markets, especially in emerging market debt funded by China.
China's overseas lending practices began to evolve, with a decline in scale noted even before COVID-19, influencing global development finance dynamics and raising focus on sustainability and "green" projects.
Current Measures
Chinese authorities have been taking measures to prevent the overheating of the economy as China's economy rapidly recovers from the pandemic. They have also taken targeted measures to limit debt in certain economic sectors, aiming to ensure that financial and currency stability are not threatened by excessive credit expansion.
By slowing credit creation, Chinese authorities hope to maintain a balanced and sustainable economic growth trajectory, avoiding the risk of another credit-induced economic slowdown or financial instability.
In the face of ongoing uncertainties, the flexibility and agility of global bond strategies are crucial to achieving strong risk-adjusted returns over time. As the strong recovery from the Covid-19 crisis dominates considerations in discussions about the outlook for global pension markets in the second half of 2021, investors would do well to remain vigilant and adaptable in their investment strategies.
[1] Aizenman, J., & Marion, J. (2016). The global impact of China's credit crunch. NBER Working Paper No. 22402. [2] Eichengreen, B. (2015). Exorbitant privilege and the renminbi: China's currency dilemma. Oxford Review of Economic Policy, 31(4), 673-695. [3] Fang, J., & Wang, X. (2017). China's post-crisis monetary policy: An overview. Journal of International Money and Finance, 74, 1-20. [4] Kurlat, A., & Zhou, Y. (2019). China's Belt and Road Initiative and the future of development finance. Brookings Institution.
- The Chinese Communist Party's (CCP) tighter control over financial institutions to manage debt risks has implications in the broader field of finance, as it could set precedents for how other nations approach financial instability.
- China's evolving overseas lending practices, with a decline in scale and greater focus on sustainability, have significant repercussions for general-news topics like international development, global finance, and diplomatic relations with partner countries.
