Bulls have long argued that China’s financial risks are contained because of the country’s low levels of external debt and large foreign-exchange reserves. That has changed. China’s external debt has been increasing by an average of $70 billion per quarter since the beginning of 2017. If it keeps rising, Beijing will have the unpalatable choice of burning through its reserves or letting the yuan fall, both of which would carry additional risks.
China and the world need to think clearly about this growing dollar debt dependence. Any cessation of funding could have severe and unforeseen consequences.
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