Signal China works through a partial balance sheet reset with debt at all-time highs

Summary

MGI finds that China is still working through a partial balance sheet reset as real estate keeps declining, leaving open questions about its future growth drivers amid weak household demand and a boom in corporate investment. Productivity growth has eased in recent years, averaging about 5.3 percent over the past five years against 7.9 percent in 2011 to 2019, though it remains above rates in advanced economies. Inflation and nominal interest rates have both fallen, producer prices have been declining since mid-2022, and concern has shifted toward deflation risk. At the macro level, lower household property investment has been offset by higher corporate investment, especially by state-owned enterprises, and by government spending. This has gone hand in hand with a substantial rise in corporate and government debt, both now at all-time highs.