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China’s problem is excessive debt in the economy, not a banking system facing insolvency. Beijing’s reform strategy should reduce the debt burden as quickly as possible to minimize the economic costs.
Instead of a hard landing or a soft landing, the Chinese economy faces two very different options, and these will be largely determined by the policies Beijing chooses over the next two years.
The past two decades of Chinese growth have disproportionately benefited a small elite that has become increasingly entrenched; the next stage must focus on liberal reforms to build social capital more broadly.
The plummeting valuation of China’s banks suggests that investors are losing confidence in China’s growth prospects.
Ineffectual loan quotas have led Chinese banks to devise new, riskier lending mechanisms. This trend will continue as long as China maintains its loose monetary and credit policies.
Although an appreciation in China's currency value could benefit the United States in theory, Chinese leaders would likely counterbalance such a rise with policies that could further damage both the Chinese and U.S. economies.