Salient to Investors:

William Pesek writes:

Japanese economists and cheerleading media now seem to realize they bought into Abenomics too hastily

We are a long way from knowing if China Premier Li has the skill or political will to put China onto a more sustainable growth path, led by domestic demand.

Li does not want growth to slide toward 5 percent at a time when protests are becoming commonplace. Instead China’s export- and investment-led growth model is burning out.  Big reforms are always easier when growth is booming, so Li needs reasonable growth to stabilize his power base.

Huang Yiping at Barclays Capital Asia said Li’s program is about deceleration, deleveraging and improving growth quality.

Reckless borrowing, largely through local government-financing vehicles, was the fuel behind China’s years of double-digit growth. More stimulus would only exacerbate China’s overcapacity problem and make the eventual debt reckoning bigger and costlier.

Only after a big default or two will markets begin to price Chinese risk appropriately, allowing Beijing to liberalize interest rates, but is Li willing to accept the consequences of market turmoil, mass unemployment and credit downgrades?

Li has the enormous task of getting Communist Party power brokers, ambitious regional leaders, a vast network of state-owned companies and the Chinese people to make sacrifices. Politics will stymie his every effort to reduce the state’s role in the economy and create the vibrant private sector China needs in order to thrive.

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