While market watchers fixated on the debt ceiling in the United States, as the clock for raising the ceiling was again reset by Congress, debt issues in China likely pose a more significant threat to the global economy. It’s a risk not lost on Chinese policymakers, who are adopting new practices in order to wean their economy off dept dependence before the worst happens. But with the current levels of debt, economic imbalances and perhaps most importantly high debt inefficiency that clock is ticking. And unlike the U.S. Congress’ debt clock, this Chinese one is not going to be reset by a simple vote of politicians to borrow more. It is imbalances such as these not so easily addressed that pose the real threat to the stock market.
With the news that China’s central bank is lowering interest rates, the bull market that began in 2009 is likely entering its final stage, which should carry it into at least the next year. Fears that the current global economic recovery is faltering led not just China’s central bank to cut rates, but the European Union to lower rates from 1 to 0.75 percent and the United Kingdom to increase its stimulus efforts. With a weak June jobs report, expectations of further monetary intervention by the United States also grew. But outside of China, monetary intervention is to a large degree pushing on a string. And even if China can give the world a temporary boost, the expansion of its economy will only provide a reprieve from the onset of the next downturn.