Tuesday, May 30, 2017

Credit Downgrade

A country can’t continue to spend its reserves indefinitely without facing the financial consequences, and China last week got a credit downgrade that by most accounts was long overdue. This raises the cost of borrowing overseas — hardly an issue for the Chinese government itself, but it may prompt banks and shadow banks to do more of their borrowing within China. That is a good thing in some ways, but it makes the Chinese financial system more top-heavy than it was already, increasing the risk of a rapid collapse after any of various kinds of failures that might occur in the future.

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