ML-Implode News - Why Xi Refuses to Let China's Zombies Die

Now comes indications of a stealth effort to boost stimulus to hit this year's 6.5% growth target, even as Xi insists he's tackling the excesses imperiling China's future. Officially, Beijing's fiscal deficit including off-balance sheet items will be about 3% this year. Economists at UBS and elsewhere now say it's higher than 10%. In other words, the invisible hand of the state is playing an increasing role in an economy Xi claims to be turning over to the private sector and market forces, deadening China's animal spirits.
These behind-the-curtain shenanigans mean the Zhu Rongji moment investors crave to rebalance growth engines isn't afoot. China's premier from 1998 to 2003 shook up the state sector as rarely before, shuttering lifeless enterprises and killing more than 40 million jobs. Xi needs to pull off an even bigger feat if he's going resurrect a reform process that's had few obvious successes.

The odds of such a shock are dwindling as Beijing circles the wagons, even corralling one of Zhu's most famous disciples - central bank Governor Zhou Xiaochuan. The People's Bank of China is at the center of efforts to convert debt into equity. While it appears to make sense in the short run, it means China's weakest links can ramp up bond issuance, adding to a debt-to-gross-domestic-product ratio already heading in Japan's direction.

This, say analysts at Zero Hedge, amounts to the "biggest shadow nationalization in history, one which will convert trillions in bad loans in insolvent enterprises into trillions in equity investments in the same enterprises, however without any new money actually coming in! Which means it will be up to new credit investors to prop up these failing businesses for a few more quarters before the reorganized equity also has to be wiped out." Hence, their characterization of this as a "deus ex machina," or God from the machine, move.
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Japan spent 15 years trying to engineer its own miraculous ending. Only in the early 2000s did banks come clean about the magnitude of their bad loan woes and begin writing them down. Thanks to that delay, however, it's still wracked by deflation, stagnant wages and sub-zero interest rates.
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Just as "The Walking Dead" characters never know how many zombies lurk in the shadows, overseas governments and investors alike haven't a clue about the scale of China's corporate undead problem. The same goes for where Xi's restructuring pledges are real or hype. It means that just like Rick Grimes, Glenn Rhee and the rest of TV's shows characters, the world won't know the size or lethality of any China shock until it's too late.

Relevant:

Why Xi Refuses to Let China's Zombies Die - Pesek