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Why Is China Not in Emergency Mode?

Our China Activity Index has now been essentially flat for six months, i.e., real growth is close to zero and the nominal economy is contracting at the margin. And as before, there's no sign of meaningful macro stimulus in the data; credit growth is fading and new fiscal issuance is weak. Why isn't China in emergency mode?

This is by far the most common question we get from investors and the answer is (i) the changed nature of decision-making, (ii) the change in state priorities, (iii) China's success in locking down risks, and (iv) limited capacity to take "traditional" stimulus measures, combined with lack of a coherent framework to deal with new economic challenges.

Also, keep in mind that this may well be the "right" answer. The collapse of property sales has clearly been excessive in our view, and China could benefit from measures to boost confidence and stabilize demand. At the same time, however, we would also agree that throwing money into another round of mega-stimulus could destabilize balance sheets and lead to a debt crisis ... and as a result, China could do worse than just "living with zero" for the time being.

Why is China Not in Emergency Mode? (Webcast)

Why is China Not in Emergency Mode? (PDF)

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