China’s policymakers are trying to deflate a lending bubble before it bursts, just as investors have begun to worry about state intervention in companies
For the better part of four decades, the rise of China’s entrepreneurial class has seemed unstoppable. Unleashed by Deng Xiaoping’s reforms beginning in the late 1970s, the country’s private businesses have fueled the biggest economic boom in the world.
But what if China’s nonstate sector isn’t as strong as it looks? What if, instead, it’s been pushed along by risky lending and frothy financial markets? That fear, along with concerns about increased government meddling, gripped investors in 2018. As domestic financial conditions tightened, Chinese equities went into the deepest sell-off among major stock markets.
The turmoil has ratcheted up pressure on the ruling Communist Party, which already faces the difficult task of combating an economic slowdown while at the same time preventing the country’s record debt burden from triggering a crisis. A failure to thread that policy needle could affect markets and economies around the world in 2019. China’s leaders “are fighting fires on so many fronts now,” says JohnPaul Smith, the London-based founder of Ecstrat Ltd. whose bearish stance on Chinese stocks in recent years has proved prescient. “Investors at the very least should be preparing for slowing growth. At the worst, there’s a possibility of considerable financial instability.”
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