Nearly two years after the historic, and still mysterious "Shanghai Accord" which in early 2016 halted what at the time appeared to a global collapse in capital markets courtesy of what appears to have been unprecedented political, fiscal and monetary coordination between the developed world and China, on October 18 the world turns its attention to what is arguably the most important political event of the year, and the logical conclusion to the stabilization process which started with the Accord, when the Chinese Communist Party kicks off its 19th Party Congress, the political event that will determine the country’s leadership lineup and policy priorities for the next five years.
Given the emphasis on maintaining stability in the run-up to this pivotal political transition, what the Congress will mean for China’s economy, its markets, and its place in the world is why Goldman has dedicated its latest "Top of Mind" periodical to the Congress, with editor Allison Nathan asking two experts on Chinese politics how Xi Jinping—who is already widely regarded as the most powerful leader of China since Mao Zedong—can use the reshuffle to further consolidate power. And, more importantly, what he intends to do with it: pursue economic reforms more aggressively or maintain the status quo.
Specifically, five of seven seats on the Politburo Standing Committee (PSC)—the senior-most CCP leadership—are expected to turn over, as is about half of the Politburo, the 25-member decision-making body that sits just below the PSC.
To explore these issues, Goldman sat down with two Chinese political experts, David Shambaugh of the George Washington University and Willy Lam of the Chinese University of Hong Kong. Both anticipate the Congress will cement Xi Jinping’s absolute authority over the CCP and the country. And both raise the possibility that Xi could be paving the way to stay in power beyond two terms, in a break with historical norms. However, Shambaugh and Lam view Xi as a visionary, not a reformist. They believe his overriding goal is to strengthen and perpetuate CCP rule, with no tolerance for policies that could destabilize the political order. (Lam argues, for example, that Xi is determined to avoid the political self-criticism that he believes brought down the USSR.) As such, both experts see only limited prospects for economic reform. But one possibility to watch: a potential reshuffling involving the role of premier that might signal a more aggressive reform stance.
Meanwhile, Goldman"s own view is that a more consolidated power base could increase the odds of structural reforms in Xi’s second term. GS Senior China Economist MK Tang and Chief China Equity Strategist Kinger Lau argue that such a shift looks more likely than in the recent past because growth led by fixed investment and easy monetary policy has become increasingly untenable. Although any reform strategy is most likely to remain selective and targeted, the potential result may be more sustainable, but slower, economic growth. Such a slowdown may be all but unavoidable according to Andrew Tilton, GS Chief Asia-Pacific Economist, given the debt build-up that China’s new leadership will have to address.
Tilton digs into the potential implications of the eye-popping increase in China’s debt-to-GDP ratio since the Global Financial Crisis (from 154% in 2008 to over 260% today), concluding that while an acute crisis is unlikely in the near term, growth will eventually have to slow as policymakers rein in credit expansion.
Given the expectation that policy support will moderate at least somewhat following the Congress, Goldman then asks its strategists and economists what investors can anticipate in the months ahead, as well as other pressing questions for the assets under their coverage (e.g., will MSCI inclusion really matter to equities, and are fears of sharp CNY depreciation justifiably dead?). In short, they believe concerns that the post-Congress environment will lead to a sharp equity sell-off, widespread credit defaults, or sharp volatility in FX and rates are overdone, although as the chart below shows, that may prove to be wishful thinking.
Of course, the potential implications of the Congress extend beyond China itself. As GS Senior Commodities Strategist Hui Shan highlights, many investors are concerned that following the Congress, metals demand and prices will drop off sharply. And, on the geopolitical front, Goldman"s interviewees point out that Xi’s consolidation of power at home goes hand in hand with greater engagement abroad, particularly as the US pulls back from global affairs.
In short, there will be plenty of China developments to watch even well after the Party Congress concludes.
Interview with David Shambaugh
David Shambaugh is Gaston Sigur Professor of Asian Studies, Political Science and International Affairs, and the founding director of the China Policy Program at the George Washington University. In addition to his work in academia, he has served on the staff of the US National Security Council East Asia Bureau and the US Department of State"s Bureau of Intelligence and Research. From 2009-2015, he served on the Board of Directors of the National Committee on US-China Relations. Shambaugh has written more than 30 books and 300 articles. Below, he argues that the 19th Party Congress is unlikely to change China’s economic or political direction.
Allison Nathan: The Chinese Communist Party (CCP) begins its 19th Party Congress on October 18. What makes this event significant?
David Shambaugh: The CCP has held a congress on average every five years since 1921, although the frequency has only become consistent in recent years. These congresses are a significant event for China’s political system, involving changes to personnel and, at times, policy. During the Congress, the Party’s General Secretary will deliver a work report covering all issue areas, which will effectively become “required reading” for 88mn party members, 45mn cadres and the public at large.
The Congress will reshuffle personnel in the three senior bodies of the CCP: the Central Committee, which has about 200 members plus 200 alternates; the Politburo, which today has 25 members; and the most senior body, the Politburo Standing Committee (PSC), which currently has 7 members. Although the upcoming congress is an interim congress— meaning that General Secretary Xi Jinping will retain his position—there will still be substantial turnover in all three bodies, with about half of the Central Committee, 10-13 of the Politburo members, and 5 PSC members expected to change.
Interim congresses are also important in that they typically involve the designation of a successor-in-waiting to become the General Secretary. However, there is no indication that Xi plans to explicitly designate a successor this year (though Chongqing Party Secretary Chen Min’er seems to be his favored candidate). Many believe there is a high probability that Xi plans to break with recent norms and stay on as General Secretary beyond the traditional 10-year term—though we will likely have to wait five years to find out. The next congress in 2022 will be very important for this reason, and also because it will occur around the 100th anniversary of the CCP’s establishment, which has enormous symbolic importance for the Party.
Allison Nathan: How are decisions about personnel and other matters made in the Standing Committee?
David Shambaugh: The General Secretary is always “first among equals.” Ever since the rule of Deng Xiaoping in the late 1970s, there has been a deliberate focus on collective leadership and decision-making by consensus at the PSC level, the Politburo level, and indeed throughout the party. As part of this process, retired senior leaders have typically played a background role in personnel decisions. However, that has all changed under Xi, who is a strongman unlike anything China has seen since Mao Zedong. On the surface, Xi engages in consultations. But in practice, the Standing Committee operates with substantial deference to him. Former president Hu Jintao’s Communist Youth League faction has been diminished significantly under Xi, and Jiang Zemin’s political influence has also waned considerably. So I see no evidence this time of retired leaders being involved in the reshuffle.
Allison Nathan: There is a lot of uncertainty about who will join the PSC. But given Xi’s apparent dominance, would any configuration suggest a meaningful shift in policy?
David Shambaugh: Although the list of potential new PSC members has narrowed, we won’t know who has been chosen or what portfolios they will assume until the new members walk out on stage 4-5 days after the Congress opens. However, only one scenario would suggest real change, in my view: the appointment of Wang Qishan, the current director of the powerful anti-corruption campaign, as Premier. The role of Premier is traditionally very important; the Premier heads the government and typically oversees economic and all other policy areas. Because it is a government position rather than a party position, the Premier technically won’t be confirmed until the National People’s Congress in March. But we will know if Wang is a possibility for the role if he appears on stage.
The appointment of Wang Qishan as Premier would have extremely positive implications for economic reform. Wang is a powerful politician and a no-nonsense decision-maker. He is both respected and feared throughout the system. He is just the kind of Premier China needs to implement the economic reforms outlined in the CCP’s Third Plenum in 2013. These reforms have gone virtually nowhere over the last four years; economists I speak with suggest that at most 15% and perhaps even less than 10% have been implemented. One reason why reform has not moved forward is that Premier Li Keqiang does not have much political power. So a strong Premier could spur reform efforts. That said, Wang Qishan stands only a 50/50 chance to become Premier, given that he is above the typical retirement age for PSC members.
Allison Nathan: What other factors have held back reform?
David Shambaugh: One factor is that Xi himself has not put muscle behind implementing the reforms he announced, although he took personal responsibility for them in 2013. Every time structural reforms have encountered difficulties, he has backed down. And I see little evidence that he actually wants to accomplish some of them, such as addressing the dominance of state-owned enterprises (SOEs). This is another reason why the role of Premier may not go to Wang Qishan, who would probably be more forceful in pushing through SOE restructuring and many other needed reforms.
There has also been substantial pushback from vested interests—SOEs, localities, provinces, banks and shadow banks, and others that don’t want to lose the advantages they enjoy under the current system. And finally, the anti-corruption campaign has had a very negative effect on initiative. Cadres have been “frozen” by the campaign. They are afraid that taking action could make them the subject of an investigation. The campaign has slowed over the past year, but it is difficult to overstate its impact; nearly half a million individuals have been formally investigated, including very senior party officials and military personnel. The People’s Liberation Army (PLA) has seen more than 4000 officers and over 100 generals—including four Central Military Commission members—taken down. That is unprecedented. This has become an institutionalized “rectification” program, and I believe it is set to continue, most likely under Li Zhanshu, an advisor to Xi Jinping who is widely expected to assume Wang Qishan’s role in the Congress.
Allison Nathan: Some experts think that Xi’s consolidation of power may presage and even enable a more open and reformist direction later in his term. How likely is that?
David Shambaugh: The theory that Xi has to “crack down before he opens up” has been floating around for a few years now. Xi is no doubt a visionary. He has developed his vision for China in various speeches, initiatives such as One Belt, One Road, and a 454-page book called The Governance of China. The Party Congress is apparently going to amend the constitution to include Xi’s “thought,” which is a very special term in Chinese communist lexicon that was previously reserved only for Mao Zedong. So Xi will be elevated into the pantheon of profound thinkers in Chinese communist history.
But as much as Xi Jinping is a visionary, he is not a reformist. Five years ago—just before the 18th Party Congress adjourned—I argued that this was the case, and I believe it has played out. He is very cautious. Strengthening the CCP has been his absolute priority. The upcoming congress won’t change this. In my view, what we’ve seen in the last five years is exactly what we are going to get over the next five, both politically and economically.
Economic reform will likely continue in some areas, such as deregulation and the opening up of the bond market. But these changes are likely to move slowly and incrementally. Most economists agree that China’s economic growth rates need to come down sharply, and that tough reforms are needed for the banking and financial system, the SOEs, the hukou system of household registration, and many other areas. But policymakers are unwilling to do what’s required for fear that less stimulus and lower employment will cause problems for the Party.
Allison Nathan: What might be the other policy priorities for President Xi over the next five years?
David Shambaugh: Foreign policy will remain a priority. One Belt, One Road is Xi Jinping’s signature project, but it remains largely on the drawing board. I expect that he will continue to roll it out over the next five years. More broadly, Xi deserves credit for stepping up China’s game in several areas of global governance—including everything from climate change to global economic policy to peacekeeping, anti-piracy and other transnational issues. The hope is that this positive engagement in the global arena continues. Xi’s speech at the World Economic Forum in Davos this year was very encouraging. That said, there is an enormous contradiction between his embrace of an open international economy, which benefits China, and the relatively closed internal investment climate for foreign multinationals in China.
Allison Nathan: What do you make of US actions towards China under the Trump administration so far?
David Shambaugh: Given Donald Trump’s aggressive campaign rhetoric regarding China, many people including me were quite worried about US-China relations, especially since Trump inherited already-tense relations from the Obama administration. But Trump has pivoted and tried to engage China since he assumed office. He deserves some credit for this positive turn of events. But he has also initiated many actions on the trade front, as well as sales of weapons to Taiwan, that have surely irritated the Chinese. In general, Trump has been quite unpredictable and fickle in his approach to China, which has not been helpful.
Allison Nathan: Is Trump a blessing or a curse for Xi’s ambitions for China?
David Shambaugh: Trump is an absolute blessing for Xi Jinping and his vision for China’s standing in the world. Just as China is embracing global engagement, Trump is withdrawing from it, expressing disdain for everything from the Trans-Pacific Partnership (TPP) to global commitments on climate change. This is creating a vacuum of global leadership, particularly in Asia. Nobody is better-placed to fill that vacuum than China, although I have my own doubts about China’s ability to do so.
Allison Nathan: In March 2015 you went so far as to say that “the endgame of Chinese communist rule has begun.” Do you have more or less conviction in that statement today?
David Shambaugh: I get asked this question a lot. In retrospect, that was most likely an overstatement. The CCP has demonstrated remarkable resiliency and ability to “muddle through.” But China is a Leninist political system, and scholars of such systems note that they pass through what I call a “Leninist lifecycle” of seven stages. They all get to the sixth stage when they need to adapt and open up, as the Soviet Union attempted under Gorbachev and as the Vietnamese are trying to do in limited ways today. But they are often unsuccessful in institutionalizing internal reforms and end up getting scared, recoiling and cracking down, which makes the system more brittle. That is what I was observing in 2015, and what I still observe today. In trying to rescue the Party, Xi’s tough actions have, in reality, stressed the system significantly.
That said, changes to these systems need to be observed not over weeks, months, or years, but over decades. The Soviet system began to decline in 1964 when Khrushchev was overthrown by Brezhnev. It took 27 years before it finally collapsed. If you look at China today, it appears strong and unified from the outside, but there are substantial stresses inside the system. I would not predict that these stresses lead to imminent collapse, but I certainly don’t think they contribute to the system’s longevity.
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Interview with Willy Lam
Willy Lam is an adjunct professor at the Center for China Studies and the Department of History at the Chinese University of Hong Kong. He is also a senior fellow at the Jamestown Foundation in Washington, DC. Dr. Lam has spent 40 years researching and writing on China’s politics, public administration, and reforms. He has held senior editorial positions at media organizations including the South China Morning Post and CNN’s Asia-Pacific headquarters. Lam is the author of six books on China, including “Chinese Politics in the Era of Xi Jinping” (2015). He is the editor of the just-published “Routledge Handbook of the Chinese Communist Party.” Below, he discusses Xi Jinping’s consolidation of power over the last five years and gives his predictions for the composition of the new Politburo Standing Committee, China’s senior-most leadership.
Allison Nathan: You have published six books on China’s leadership, most recently about Xi Jinping. How would you describe Xi and his goals?
Willy Lam: Xi Jinping is a charismatic and authoritarian leader, significantly more so than his two predecessors, Presidents Hu Jintao and Jiang Zemin. As a “princeling,” a descendant of a prominent official, Xi has always had confidence to act authoritatively and to take risks. This has likely contributed to his persona as a strongman with a Machiavellian streak.
Xi is also a nationalist. His most famous slogan, the “Chinese Dream,” conveys the idea of China rising up after one and a half centuries of Western colonialism. His goal is for China to close the development gap with the US, and to restore its rightful position in the world as the Middle Kingdom of the 21st century. This emphasis on nationalism is understandable given that the so-called Chinese economic miracle—annual GDP growth rates of 9-11%—ended several years ago, even before Xi took power. With the economic outlook less rosy than before, nationalism has become a key pillar of the party’s legitimacy.
Finally, Xi is a Maoist. He firmly believes that power and national resources should remain concentrated in the Chinese Communist Party (CCP); indeed, he views this monopoly as critical to the party’s survival. For example, the lesson Xi draws from the demise of the USSR is that criticism of party founders weakened and eventually undermined the Soviet regime. So Xi believes that for the CCP to survive into the 21st century, there should be no criticism of Maoist norms and practices.
Allison Nathan: Many observers have noted Xi’s consolidation of power. What evidence is there of this consolidation?
Willy Lam: There are many examples of Xi’s consolidation of power. In just five years, he has built his faction into the most powerful one within the CCP, which in itself is a testament to his influence. This faction consists of Xi’s former associates and protégés in Fujian and Zhejiang provinces, where he worked earlier in his career, as well as officials who have worked in his home province of Shaanxi and some of his classmates and early acquaintances. Xi is also personally involved in policy decisions to a greater extent than many of his predecessors. For example, the CCP has had a long tradition of granting authority over economic matters to the premier. Buttoday, the ultimate arbiter of financial and economic policy is Xi himself. In addition, Xi has secured a firm grip on the army, the police, and the overall security apparatus by promoting his protégés to senior positions across these entities. Whoever controls the military in China effectively controls the party and the state, so this leaves Xi’s power unchallenged. Finally, the effectiveness of Xi’s anti-corruption campaign has both demonstrated and enhanced his power. The Central Commission for Disciplinary Inspection, the official institution in charge of this drive, has been effective at rooting out not only corruption but also political adversaries.
Allison Nathan: What outcomes of the 19th Party Congress would indicate whether Xi has consolidated his power further?
Willy Lam: There is a broad expectation that this Party Congress will cement Xi Jinping’s absolute authority. For example, it is very likely that the Congress will decide to change the CCP Constitution to include Xi Jinping Thought as a supreme guiding philosophy for the party and state. In CCP ideology, “thought” is far superior to “theory,” and the former has previously applied to the ideas of only one leader—Mao Zedong. Formalizing Xi Jinping Thought would therefore elevate Xi to the status of Mao’s 21st-century equivalent.
Some analysts have also speculated that the Politburo Standing Committee (PSC), China’s highest ruling council, could shrink to five from seven members, which in their view would reflect further consolidation of power by Xi. I think the number of members will remain seven because Xi will still feel the need to give two or three seats to representatives of other factions. But this has no bearing on his level of influence. There is no doubt that Xi has overriding authority regarding the composition of the new leadership and that he will dominate the new committee regardless of its size.
Finally, there is considerable focus on the fortunes of two individuals. The first is Wang Qishan, the current head of the anti-corruption campaign and a close ally of Xi who is widely regarded as China"s second most powerful leader. Wang is 69 years old, one year above the age at which most PSC members retire. But some analysts believe that he could stay on, interpreting Wang’s recent high-profile meetings with foreign officials and public figures as a sign that his political fortunes are rising. However, there is a good possibility that Wang will retire, largely because his anti-corruption drive has put him at odds with non-Xi-dominated power blocs in the CCP, including the Communist Youth League faction led by Hu Jintao and the Shanghai faction led by Jiang Zemin. Letting Wang retire could therefore allow Xi to obtain more concessions from these factions. It would also help Xi manage two other issues: Wang’s own power-grabbing tendencies, and corruption allegations against him.
The second official in focus is Premier Li Keqiang, who is a member of the Communist Youth League faction I just mentioned. There is speculation that Li could lose his premiership and be relegated to the less powerful post of Chairman of the National People’s Congress, China’s parliament. I believe he will remain premier, but that Xi will continue to be far more influential in setting economic policy, given that Li’s own policymaking capacity has beensubstantially diminished under Xi’s dominant rule.
Allison Nathan: What do you expect the new composition of the Standing Committee to be?
Willy Lam: Beyond Xi and Li keeping their seats, I would group potential PSC inductees into three tiers according to their chances of joining the committee. In the first tier, I believe the most likely candidate is Li Zhanshu, Xi’s most trusted advisor. Li is already a Politburo member, and there seems to be a high probability that he replaces Wang Qishan as the anti-corruption tsar. The next most likely candidate is Zhao Leji, who is another very close associate of Xi and the director of the Organization Department, the head of personnel within the CCP.
In the second tier, I would place Xi Jinping’s key advisor on both domestic and foreign policy, Wang Huning. Wang is a former professor from Shanghai who has served three Chinese presidents: Jiang Zemin, Hu Jintao, and now Xi Jinping. But there is no precedent for a policy advisor advancing to the PSC, which limits his chances. Also in the second tier are two potential inductees whose odds depend on the extent to which Xi appeases other factions. One is Han Zheng, the longstanding party secretary of Shanghai who has professed allegiance to Xi Jinping but has some ties to the Shanghai faction. The other is Wang Yang, vice premier of the State Council, who represented China in the Comprehensive Economic Dialogue with the US and is a senior member of the rival Communist Youth League faction.
The third tier consists of rising stars from the so-called sixth generation, the politicians born from the late 1950s to the late 1960s. The two most talked-about names are Hu Chunhua, the party secretary of Guandong province, who is already a Politburo member but is a protégé of Hu Jintao, and Chen Min"er, the newly-promoted party secretary of Chongqing and a protégé of Xi Jinping.
Allison Nathan: Will Xi pick a successor? And is he attempting to lay the groundwork for a third term?
Willy Lam: A big question mark remains as to whether Xi wants to tap a successor anytime soon. He has long-term ambitions for China; the “Chinese Dream” is for China to become a full-fledged superpower by 2049, the centenary of the establishment of the People"s Republic. In the eyes of Xi Jinping, these long-standing goals require that he stay in power as long as possible. If Xi were committed to serving just two five-year terms like his predecessors, he would have promoted dozens of officials from the seventh generation—the cadres born in the 1970s—by now. Instead, only four members of that generation occupy senior positions today. In my opinion, Xi islikely to remain supreme leader for at least fifteen years, until the 21st Party Congress in 2027. If that is indeed the case, he is in no hurry to pick a successor.
Allison Nathan: Will Xi use his power to propel economic reform?
Willy Lam: In my view, only to a very limited extent. China"s economic report card under Xi has been mixed. He has continued some of the economic reforms first initiated by Deng Xiaoping. And there have been achievements across various parts of the economy. China now owns more miles of highspeed railway than the rest of the world combined, for example. And it has made advancements in artificial intelligence, robotics, green technology, and so forth. But this innovation has been largely state-sponsored, and there has not been much progress with regard to the long-standing goal of restructuring the economy in terms of breaking its dependency on government investments and developing consumer spending and services.
Xi’s priority is preserving the CCP’s monopoly on power. Therefore, the party will not tolerate any mistake or adopt any policy—no matter now brilliant—that could jeopardize its control. Xi made this clear in a speech in which he compared China to the Titanic, saying that if China starts to sink, “it will go down just like that.” So he is keenly aware of avoiding any possible threat to party stability. What this means in practice is that China will remain a mixed economy, partially integrated into the international marketplace, but still with a dominant party-state apparatus in sectors such as defense, finance, insurance, oil and gas, and telecommunications. Indeed, Xi is a firm believer in state capitalism and there is no indication that he will relax control over China’s state-owned conglomerates. Having come to understand his view of the world, it is clear to me that he is more Maoist than he is reformist.
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Dealing with the debt drag: Goldman"s economist Andrew Tilton argues that the drag on growth from China’s debt buildup is not over yet
China’s debt-to-GDP ratio has risen from 154% in 2008 to over 260% today. A key challenge for China’s leadership over the next five years will be to bring this credit boom under control, likely at the expense of growth.
Breaking the mold
China’s debt buildup differs from most historical debt booms. First, it is very large—as a share of GDP, it ranks as one of the largest debt buildups in modern history. In absolute size, it is the largest debt buildup ever. Second, it is occurring in a very large economy—China currently represents 18% of world GDP on a purchasing power parity basis and 15% on a dollar basis. Third, the overwhelming majority of China’s debt is domestic, so a “sudden stop” of external funding is not a principal concern. Instead, the worry is the distribution of funds (and ultimate credit losses) within the Chinese system. These characteristics leave no obvious historical analogy to China’s debt buildup; in our view, the closest recent one is the Japanese boom of the 1980s.
How we got here
In the depths of the global financial crisis, Chinese authorities turned to a 4tn renminbi stimulus package of infrastructure and other fiscal outlays (supported by bank credit). While this was manageable for an economy with China’s strong fiscal position, excess credit growth and growing fiscal deficits have persisted since 2009. One reason for the deteriorating credit/growth tradeoff is the fading impulse from economic liberalization and export growth following China’s entry into the World Trade Organization in 2001. The export boom did not require significant “levering up” of Chinese households or businesses; without it, policymakers tolerated ongoing credit growth as a necessary tool to reach still-ambitious real GDP growth targets
Lessons from history
What are the likely consequences of this debt boom? Looking at the experiences of 55 countries around the world back to 1960, and a few as far back as the late 1800s, we found several characteristic outcomes for the economy and asset markets:
- Economic growth usually slows after large-economy domestic debt booms. The slowdown’s source is domestic demand weakness, particularly private consumption and investment, which benefited from easy credit in the boom period. (However, at this point China’s investment/GDP ratio is only 2pp below its all-time peak of 45%.)
- In the context of weak domestic demand, inflationary pressures tend to ease and the current account improves.
- Policy interest rates are cut to support debt repayment and economic activity.
- Equity markets tend to outperform global benchmarks in the boom phase and underperform in the bust.
- Currencies typically weaken after debt booms, but this result is less robust for large economies. One reason for the difference might be that smaller economies typically have more external debt and therefore are at greater risk of a “sudden stop” in financing with abrupt economic and asset market consequences. Another reason is the outsized importance of Japan in this analysis, as it saw significant yen appreciation in the late 1980s and early 1990s. (Given the deflation that ensued in Japan, Chinese policymakers likely view this as a cautionary tale, and the recent management of the CNY suggests they have little interest in repeating the Japanese experience.)
- Risks of a banking or broader financial crisis are heightened, though this is far from a guaranteed outcome.
Implications for today
These themes played out in China from 2012-2015, to varying degrees. Growth slowed, inflation fell, policy rates were cut significantly in 2015, the equity market crashed that year, and the currency depreciated about 10% on a trade-weighted basis. But the economy and markets have performed much better recently—so has the whole story already played out? Unfortunately, we think not. The improvement over the past year partly reflects renewed stimulus and reacceleration of debt growth over the 2015-16 period that is only beginning to be unwound, with as yet uncertain consequences for the economy. So, while we do not expect an acute crisis nearterm, we do expect growth to eventually slow anew as policymakers continue to rein in credit expansion.
