Chinese President Xi Jinping wrote in an article that China must try to overcome Thucydides Trap and the middle-income trap.
The first one means China should handle its relationship well with major powers like the US. The second requirement means China has to improve the quality and efficiency as it develops its economy.
Thucydides Trap, a term coined by political scientist and Harvard University professor Graham Allison, refers to a situation when a rising power causes fear in an established power, which could escalate into war.
Heightening trade tensions with the US is an example of how Thucydides Trap could present a challenge for China.
Meanwhile, the success of China in overcoming the middle-income trap hinges on the deleveraging policy initiative.
How China handles the two issues will determine its economic performance in the second half of this year, as well as over the long run.
Structural deleveraging has already affected the source of funds for property and local-government financing vehicles. That has weighed on the growth of China’s housing and infrastructure investment.
Meanwhile, the US-China trade war coupled with faltering economic recovery in other parts of the world may put pressure on China’s exports.
I believe authorities would keep relatively loose monetary policy in the second half of the year.
The Chinese central bank may fine-tune the monetary policy to prevent market panic towards increasing defaults.
We would see a structural decline of total social financing growth, as financial institutions shift more off-balance-sheet lending to the balance sheet.
Rising rates, weakening yuan and trade frictions are threatening the Asia economy and corporate earnings. These factors will play into the Hong Kong stock market in a meaningful way.
Many of my clients are concerned about tighter market liquidity and rising funding costs.
In the second half, Chinese authorities would likely prioritize the expansion of domestic consumption, lowering of state enterprises’ debt ratios and reduction of local government debt.
The central bank will ensure sufficient market liquidity through open market operations or reserve requirement ratio reductions.
The full article appeared in the Hong Kong Economic Journal on June 25
Translation by Julie Zhu
[Chinese version 中文版]
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