“The core issue that they are dealing with is the debt issue in China, which is obviously growing at an extremely rapid pace; it is growing at an unsustainable pace over the long term,” Beddor told CNBC’s “The Rundown“.
The Chinese government, said Eurasia’s Beddor, may have “bigger fires to fight” right now, but getting distracted by the crisis of the day will not help the economy in the long run. The issue at the heart of China’s debt problem is one of capital allocation, which is needed to sustain long-term growth and handle the high leverage levels, he added.
Currently, China is trying to curb capital outflows to support the weakening yuan as regulators keep their eyes on policy changes in the U.S.
At the same time, China has said before its inclusion into the International Monetary Fund Special Drawing Rights valuation basket that it wants to gradually liberalize its capital markets, highlighting monetary policy tension, Beddor said.
“They try to do this this awkward thing where state admin of foreign exchange says we’re not imposing capital barriers, what we’re doing is tightening enforcement of it. To some extent, that is true. But at the end of the day, is it becoming harder to get your capital out of China?
“There’s absolutely no question about that. It just shows that they may say something about reforms but when the economic reality bites, they will defend their interests very rapidly,” he added.
