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Capex proves a blunt policy instrument for China

Thursday, January 8, 2015

Significance

Recent developments suggest that policymakers are happy with slower investment growth, but worry about the possibility of an abrupt slowdown in lending and the risk that household consumption will not yet be able to pick up the slack as investment slows.

Impacts

  • The central government will struggle to control spending at the local level.
  • Policymakers will find it difficult to channel capital towards health, education and housing as urbanisation and development targets demand.
  • If deflationary pressure from oil prices and overcapacity feeds through this will drive up the real cost of credit.
  • Without further liberalisation of interest rates, funding future investment is likely to become more costly.
  • Fast-tracking projects in industrial sectors where capital expenditure is weakening may risk inefficient investment.
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