China's markets took a tumble after a front page article on May 9 in the People's Daily, the official Communist Party mouthpiece, questioned the sustainability of the economy's recent credit-fueled growth and highlighted potential risks, in particular the rapid accumulation of debt. The unidentified "authoritative source" cited in the article warned that high leverage could lead to a systemic financial crisis, a deep recession or the evaporation of household savings and wealth.
The source urged local governments to push for painful but necessary structural reforms and embrace more supply-side policies, which in China is usually a reference to measures to eliminate excess production capacity and allow the closure of "zombie" companies kept alive by state support. The article concluded that China's economic trajectory is set to be "L-shaped," rather than "U-shaped" or, ideally, "V-shaped."
