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China Was Never Likely to Have a Debt Crisis

While China is unlikely to have a debt crisis, it will face more difficulties when making the adjustment as debt accumulates. A strong leadership may then be required to implement necessary reforms.

 

Carnegie’s Michael Pettis spoke with CNBC about China’s debt problem. Pettis argued that China is unlikely to have a debt crisis because it has a closed banking system and credible regulators. Recent tensions between the United States and China have important implications for China’s debt problem because China needs to increase its domestic demand in the absence of strong demand abroad, but, Pettis said, this can lead to more debts. Pettis argued that improving domestic demand by increasing the share of household income in GDP is not easy and the centralization of power may be necessary to overcome opposition. Because of this, he said that removing the term limit for Xi Jinping may be beneficial for China in the short term regardless of its long-term effects.

 

 

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