CHINA-ECONOMY
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In the first seven months of 2015, China’s total trade volume decreased by 7.3 percent, with exports and imports dropping 8.8 percent and 8.6 percent, respectively, in July. The country’s producer price index has fallen for 42 consecutive months, to a record-low of -5.4 percent in July. And foreign-exchange reserves fell to $3.65 trillion in July, from a peak of $3.99 trillion a year earlier. While China is far from insolvent — the country remains a net creditor, to the tune of nearly $1.8 trillion — more domestic liquidity must be released to support the economy, and especially the private sector, as it adapts to domestic and global structural changes. Indeed, it was the lack of stock-market liquidity, together with fragile confidence, that triggered the recent financial-market volatility.
China now confronts three structural imbalances. First, the banking system, which dominates lending, typically funds long-term investments with short-term bank deposits, creating a maturity mismatch. Second, Chinese balance sheets carry too much debt relative to equity. And, third, there is an imbalance between the state and the market, with the private sector still lacking access to liquidity relative to state-owned enterprises.
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