Debt troubles within the Great Wall

http://www.ft.com/intl/cms/s/0/b78d8c0e-b661-11e3-905b-00144feabdc0.html#axzz2y9bt6G4O

2014.04.01 by Martin Wolf

This leaves the Chinese government with an apparent dilemma: let the debt accumulation continue, creating bigger problems in the future; or implement rapid reform and risk a fall in investment and a bigger unplanned slowdown now. The solution must be a middle way: accelerate adjustment and reform, while sustaining aggregate demand through monetary and fiscal policies operated by the central government.

China’s ability to postpone a crisis might lead the powers-that-be to prefer the option of adjustment delayed. That could prove a huge mistake. Growth cannot be sustained by increasing indebtedness indefinitely. Reform and rebalancing are essential. From what I heard at the China Development Forum last month the Chinese authorities understand this. Indeed without these reforms, their plan for liberalising the capital account could be lethal. China can avoid a financial crisis. That is a boon, though it also risks reducing pressure for reform. Yet reform must come – and the sooner the better.