The Republic Has Fallen: The Deep State’s Plot To Take Over America Has Succeeded

Submitted by John Whitehead via The Rutherford Institute,
No doubt about it.
The coup d’etat has been successful.
The Deep State – a.k.a. the police state, a.k.a. the military industrial complex – has taken over.
The American system of representa…

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Here Are The 66 Programs That Trump’s Budget Eliminates

President Trump’s fiscal 2018 budget proposal would completely eliminate 66 federal programs, for a savings of $26.7 billion. 

As The Hill reports, some of the programs would receive funding for 2018 as part of a phasing-out plan.

Here are the programs the administration wants on the chopping block…

Agriculture Department — $855 million

  • McGovern-Dole International Food for Education
  • Business-Cooperative Service
  • Rural Water and Waste Disposal Program Account
  • Single Family Housing Direct Loans

Commerce Department — $633 million

  • Economic Development Administration
  • Manufacturing Extension Partnership
  • Minority Business Development Agency
  • National Oceanic and Atmospheric Administration Grants and Education

Education Department — $4.976 billion

  • 21st Century Community Learning Centers
  • Comprehensive Literacy Development Grants
  • Federal Supplemental Educational Opportunity Grants
  • Impact Aid Payments for Federal Property
  • International Education
  • Strengthening Institutions
  • Student Support and Academic Enrichment Grants
  • Supporting Effective Instruction State Grants
  • Teacher Quality Partnership

Energy Department — $398 million

  • Advanced Research Projects Agency—Energy
  • Advanced Technology Vehicle Manufacturing Loan Program and Title 17 Innovative Technology Loan Guarantee Program
  • Mixed Oxide Fuel Fabrication Facility

Health and Human Services — $4.834 billion

  • Agency for Healthcare Research and Quality
  • Community Services Block Grant
  • Health Professions and Nursing Training Programs
  • Low Income Home Energy Assistance Program

Homeland Security — $235 million

  • Flood Hazard Mapping and Risk Analysis Program
  • Transportation Security Administration Law Enforcement Grants

Housing and Urban Development — $4.123 billion

  • Choice Neighborhoods
  • Community Development Block
  • HOME Investment Partnerships Program
  • Self-Help and Assisted Homeownership Opportunity Program Account

Interior Department — $122 million

  • Abandoned Mine Land Grants
  • Heritage Partnership Program
  • National Wildlife Refuge Fund

Justice Department — $210 million

  • State Criminal Alien Assistance Program

Labor Department — $527 million

  • Migrant and Seasonal Farmworker Training
  • OSHA Training Grants
  • Senior Community Service Employment Program

State Department and USAID — $4.256 billion

  • Development Assistance

Earmarked Appropriations for Non-Profit Organizations

  • The Asia Foundation
  • East-West Center
  • P.L. 480 Title II Food Aid

State Department, USAID, and Treasury Department — $1.59 billion

  • Green Climate Fund and Global Climate Change Initiative

Transportation Department — $499 million

  • National Infrastructure Investments (TIGER)

Treasury Department — $43 million

Global Agriculture and Food Security Program

Environmental Protection Agency — $493 million

  • Energy Star and Voluntary Climate Programs
  • Geographic Programs

National Aeronautics and Space Administration — $269 million

  • Five Earth Science Missions
  • Office of Education

Other Independent Agencies — $2.683 billion

  • Chemical Safety Board
  • Corporation for National and Community Service
  • Corporation for Public Broadcasting
  • Institute of Museum and Library Services

International Development Foundations

  • African Development Foundation
  • Inter-American Foundation
  • Legal Services Corporation
  • National Endowment for the Arts
  • National Endowment for the Humanities
  • Neighborhood Reinvestment Corporation
  • Overseas Private Investment Corporation

Regional Commissions

  • Appalachian Regional Commission
  • Delta Regional Authority
  • Denali Commission
  • Northern Border Regional Commission
  • U.S. Institute of Peace
  • U.S. Trade and Development Agency
  • Woodrow Wilson International Center for Scholars

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Why China’s Strategic Petroleum Reserve Is All That Matters For OPEC

When OPEC sits down on Thursday, keeping the price of Brent above $50 (to avoid a budget catastrophe and social upheaval in Saudi Arabia) and below $60 (to prevent US production from going exponential), will be just one problem the cartel nations and various hangers-on will be desperate to solve. A much bigger one, literally, is the problem that led to this week’s OPEC meeting in the first place, and years of headache for OPEC and non-OPEC nations: a record global oil inventory glut.

The supply glut that began in mid-2014 has dumped almost one billion barrels of petroleum into global inventories. However, of this only 35–45% has ended up in transparent OECD tanks. For OPEC, that is all the matters – in the past, OPEC oil ministers have repeatedly referenced the level of OECD petroleum inventories relative to their five-year average as a gauge of the rebalancing. And, as ScotiaBank notes, those inventories were more than 280 Mbbl above their five-year average as of January and, while European stocks have been falling into a healthier range, the same cannot be said of industry stocks in the US, which despite declining for several weeks, are just below all time highs.

But forget OECD: an increasingly greater concern for OPEC is not the less than a third of above ground oil held in developed nations; it is the rest that is the big challenge. As ScotiaBank’s Rory Johnston points out in the following chart, the majority of the remainder was absorbed by China’s vast and growing strategic petroleum reserve (SPR), which means that “the lion’s share of functional—and thus needing to draw from an OPEC perspective—industry inventories remain in the OECD, and specifically in the US (chart 3).”

As we have explained on several occasions over the past year, China’s SPR is far more important to the global oil (im)balance and inventory glut than the less than a third of total oil produced since the summer of 2014 and stored. This is due to one main reason: while ScotiaBank is correct that any draws will likely come from OECD storage, it forgets the demand side of the equation.

 


Storage tanks in China’s strategic oil reserve complex in Zhoushan

One year ago, JPMorgan estimated that the daily build of China’s SPR, had grown at a breakneck pace, from 491Kbpd average in 2015 to a record 1.191MMbpd in 2016 through May, equivalent to roughly 15% of the country’s total crude oil imports.

More importantly, it was roughly a year ago when JPM calculated that China’s SPR was getting dangerously close to its estimated capacity, just over 500 million barrels.

JPM also made a forecast that based on its assumptions, Chinese oil imports would slide by roughly the amount that would have been going into the SPR starting in late 2016 as the reserve hit capacity. When that did not happen, there was much confusion among the commodity space, until in late September 2011, satellite imagery from Orbital Insight revealed that the total size of China’s SPR was vastly greater than previously estimated.

According to satellite images by  geospatial analytics startup Orbital Insight, China, has not only misrepresented how much oil it has stored, it has done so at a massive scale, with the real number dwarfing even JPM own estimate: the real amount of Chinese oil in storage, according to Orbital, was a whopping 600 million barrels as of May. Assuming JPM’s estimated rate of SPR accumulation of about 1mmbpd, the 600 million number as of May would have grown to well over 700 million barrels as of September. 

 

Orbital’s figure as first reported by Bloomberg, is well over two times larger than China’s official estimates for strategic petroleum reserves and for commercial stocks, said Orbital Chief Executive Officer James Crawford.

To be sure, in late 2016 other skeptics started warning that even with the revised size estimates, China’s SPR was likely approaching capacity. Last September, the IEA warned that “recent pillars of demand growth China and India are wobbling.” S&P Global Platts’ Ernsberger, cited by CNBC, said that the slowdown in Chinese demand was worrying for major oil producers.

“The demand picture is very unsettling for OPEC and for all producers of crude and refined products (and this is seen most significantly in) the slowdown in growth in the Chinese market. China has returned more incremental demand for the oil market in the last five years than any other country in the world and more than almost any of the counties combine. But this year demand growth in China has stalled and that represents a significant change in the environment for producers both in OPEC and outside it.”

Then 2016 came and went, and we find ourselves almost mid-way into 2017 and ask: has anything finally changed, and will all those predictions of an imminent Chinese SPR overflow finally prove accurate?

We don’t know just yet, but according to data released by the General Administration of Customs data on Tuesday, China’s oil stockpiling pace finally tumbled to 1.36mbpd in April, from 1.6mbpd in March, the sharpest decline in reserve accumulation in years, and in line with the recent slowdown from record oil imports. If indeed China is finally at capacity for the SPR, the SPR stocpiling is about to fall off as cliff this month.

In other words, all those forecasts that China’s SPR is almost full appear to be finally coming true, and at the worst possible time for OPEC, because if suddenly over 1 million in daily “demand” is pulled from the market, OPEC will suddenly find themselves with another huge glut now that Beijing is no longer waving it in. In fact, we contend that while OPEC’s decision on Thursday is fully priced in by the market, the only thing that matters for the future price of oil is how long until China halts SPR imports. Here, those who have faster access to commercial satellite imagery will be a distinct advantage over everybody else, even the momentum-chasing, headline scanning algos…

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US Journalism’s New “Golden Age”?

The Washington Post and other big media are hailing a new journalistic “golden age” as they punish President Trump for disparaging them, but is this media bias a sign of good journalism or itself a scandal, asks Robert Parry, via ConsotriumNews.com…

The mainstream U.S. media is congratulating itself on its courageous defiance of President Trump and its hard-hitting condemnations of Russia, but the press seems to have forgotten that its proper role within the U.S. democratic structure is not to slant stories one way or another but to provide objective information for the American people.

The Washington Post building in downtown Washington, D.C. (Photo credit: Washington Post)

By that standard – of respecting that the people are the nation’s true sovereigns – the mainstream media is failing again. Indeed, the chasm between what America’s elites are thinking these days and what many working-class Americans are feeling is underscored by the high-fiving that’s going on inside the elite mainstream news media, which is celebrating its Trump- and Russia-bashing as the “new golden age of American journalism.”

The New York Times and The Washington Post, in particular, view themselves as embattled victims of a tyrannical abuser. The Times presents itself as the brave guardian of “truth” and the Post added a new slogan: “Democracy dies in darkness.” In doing so, they have moved beyond the normal constraints of professional, objective journalism into political advocacy – and they are deeply proud of themselves.

In a Sunday column entitled “How Trump inspired a golden age,” Washington Post columnist Dana Milbank wrote that Trump “took on the institution of a free press – and it fought back. Trump came to office after intimidating publishers, barring journalists from covering him and threatening to rewrite press laws, and he has sought to discredit the ‘fake news’ media at every chance. Instead, he wound up inspiring a new golden age in American journalism.

“Trump provoked the extraordinary work of reporters on the intelligence, justice and national security beats, who blew wide open the Russia election scandal, the contacts between Russia and top Trump officials, and interference by Trump in the FBI investigation. Last week’s appointment of a special prosecutor – a crucial check on a president who lacks self-restraint – is a direct result of their work.”

Journalism or Hatchet Job?

But has this journalism been professional or has it been a hatchet job? Are we seeing a new “golden age” of journalism or a McCarthyistic lynch mob operating on behalf of elites who disdain the U.S. constitutional process for electing American presidents?

Director of National Intelligence James Clapper (right) talks with President Barack Obama in the Oval Office, with John Brennan and other national security aides present. (Photo credit: Office of Director of National Intelligence)

For one thing, you might have thought that professional journalists would have demanded proof about the predicate for this burgeoning “scandal” – whether the Russians really did “hack” into emails of the Democratic National Committee and Hillary Clinton campaign chairman John Podesta and then slip the information to WikiLeaks to influence the outcome of the 2016 election.

You have surely heard and read endlessly that this conclusion about Russia’s skulduggery was the “consensus view of the 17 U.S. intelligence agencies” and thus only some crazy conspiracy theorist would doubt its accuracy even if no specific evidence was evinced to support the accusation.

But that repeated assertion is not true. There was no National Intelligence Estimate (or NIE) that would compile the views of the 17 intelligence agencies. Instead, as President Obama’s Director of National Intelligence James Clapper testified before a Senate Judiciary subcommittee on May 8, the Russia-hacking claim came from a “special intelligence community assessment” (or ICA) produced by selected analysts from the Central Intelligence Agency, National Security Agency and Federal Bureau of Investigation, or as Clapper put it, “a coordinated product from three agencies – CIA, NSA, and the FBI – not all 17 components of the intelligence community.”

Further, as Clapper explained, the “ICA” was something of a rush job beginning on President Obama’s instructions “in early December” and completed by Jan. 6, in other words, a month or less.

Clapper continued: “The two dozen or so analysts for this task were hand-picked, seasoned experts from each of the contributing agencies.” However, as any intelligence expert will tell you, if you “hand-pick” the analysts, you are really hand-picking the conclusion.

You can say the analysts worked independently but their selection, as advocates for one position or another, could itself dictate the outcome. If the analysts were hardliners on Russia or hated Trump, they could be expected to deliver the conclusion that Obama and Clapper wanted, i.e., challenging the legitimacy of Trump’s election and blaming Russia.

The point of having a more substantive NIE is that it taps into a much broader network of U.S. intelligence analysts who have the right to insert dissents to the dominant opinions. So, for instance, when President George W. Bush belatedly ordered an NIE regarding Iraq’s WMD in 2002, some analysts – especially at the State Department – inserted dissents (although they were expunged from the declassified version given to the American people to justify the 2003 invasion of Iraq).

An Embarrassing Product

Obama’s “ICA,” which was released on Jan. 6, was a piece of work that embarrassed many former U.S. intelligence analysts. It was a one-sided argument that lacked any specific evidence to support its findings. Its key point was that Russian President Vladimir Putin had a motive to authorize an information operation to help Hillary Clinton’s rival, Donald Trump, because Putin disdained her work as Secretary of State.

Russian President Vladimir Putin addresses UN General Assembly on Sept. 28, 2015. (UN Photo)

But the Jan. 6 report failed to include the counter-argument to that cui bono assertion, that it would be an extraordinary risk for Putin to release information to hurt Clinton when she was the overwhelming favorite to win the presidency. Given the NSA’s electronic-interception capabilities, Putin would have to assume that any such undertaking would be picked up by U.S. intelligence and that he would likely be facing a vengeful new U.S. president on Jan. 20.

While it’s possible that Putin still took the risk – despite the daunting odds against a Trump victory – a balanced intelligence assessment would have included such contrary arguments. Instead, the report had the look of a prosecutor’s brief albeit without actual evidence pointing to the guilt of the accused.

Further, the report repeatedly used the word “assesses” – rather than “proves” or “establishes” – and the terminology is important because, in intelligence-world-speak, “assesses” often means “guesses.” The report admits as much, saying, “Judgments are not intended to imply that we have proof that shows something to be a fact. Assessments are based on collected information, which is often incomplete or fragmentary, as well as logic, argumentation, and precedents.”

In other words, the predicate for the entire Russia-gate scandal, which may now lead to the impeachment of a U.S. president and thus the negation of the Constitution’s electoral process, is based partly on a lie – i.e., the claim that the assessment comes from all 17 U.S. intelligence agencies – and partly on evidence-free speculation by a group of “hand-picked” analysts, chosen by Obama’s intelligence chiefs.

Yet, the mainstream U.S. news media has neither corrected the false assertion about the 17 intelligence agencies nor demanded that actual evidence be made public to support the key allegation that Russia was the source of WikiLeaks’ email dumps.

By the way, both Russia and WikiLeaks deny that Russia was the source, although it is certainly possible that the Russian government would lie and that WikiLeaks might not know where the two batches of Democratic emails originated.

A True ‘Golden Age’?

Yet, one might think that the new “golden age of American journalism” would want to establish a firm foundation for its self-admiring reporting on Russia-gate. You might think, too, that these esteemed MSM reporters would show some professional skepticism toward dubious claims being fed to them by the Obama administration’s intelligence appointees.

President Donald Trump being sworn in on Jan. 20, 2017. (Screen shot from Whitehouse.gov)

That is unless, of course, the major U.S. news organizations are not abiding by journalistic principles, but rather see themselves as combatants in the anti-Trump “resistance.” In other words, if they are behaving less as a Fourth Estate and more as a well-dressed mob determined to drag the interloper, Trump, from the White House.

The mainstream U.S. media’s bias against Putin and Russia also oozes from every pore of the Times’ and Post’s reporting from Moscow. For instance, the Times’ article on Putin’s comments about supposed secrets that Trump shared with Russian Foreign Minister Sergey Lavrov at the White House had the headline in the print editions: “Putin Butts In to Claim There Were No Secrets…” The article by Andrew Higgins then describes Putin “asserting himself with his customary disruptive panache” and “seizing on foreign crises to make Russia’s voice heard.”

Clearly, we are all supposed to hate and ridicule Vladimir Putin. He is being demonized as the new “enemy” in much the way that George Orwell foresaw in his dystopian novel, 1984. Yet, what is perhaps most troubling is that the major U.S. news outlets, which played instrumental roles in demonizing leaders of Iraq, Syria and Libya, believe they are engaged in some “golden age” journalism, rather than writing propaganda.

Contempt for Trump

Yes, I realize that many good people want to see Trump removed from office because of his destructive policies and his buffoonish behavior – and many are eager to use the new bête noire, Russia, as the excuse to do it. But that still does not make it right for the U.S. news media to abandon its professional responsibilities in favor of a political agenda.

The run-down PIX Theatre sign reads “Vote Trump” on Main Street in Sleepy Eye, Minnesota. July 15, 2016. (Photo by Tony Webster Flickr)

On a political level, it may not even be a good idea for Democrats and progressives who seem to be following the failed strategy of Hillary Clinton’s campaign in seeking to demonize Trump rather than figuring out how to speak to the white working-class people who voted for him, many out of fear over their economic vulnerability and others out of anger over how Clinton dismissed many of them as “deplorables.”

And, by the way, if anyone thinks that whatever the Russians may have done damaged Clinton’s chances more than her colorful phrase disdaining millions of working-class people who understandably feel left behind by neo-liberal economics, you may want to enroll in a Politics 101 course. The last thing a competent politician does is utter a memorable insult that will rally the opposition.

In conversations that I’ve had recently with Trump voters, they complain that Clinton and the Democrats weren’t even bothering to listen to them or to talk to them. These voters were less enamored of Trump than they were conceded to Trump by the Clinton campaign. These voters also are not impressed by the endless Trump- and Russia-bashing from The New York Times, The Washington Post, CNN and MSNBC, which they see as instruments of the elites.

The political danger for national Democrats and many progressives is that mocking Trump and thus further insulting his supporters only extends the losing Clinton strategy and cements the image of Democrats as know-it-all elitists. Thus, the Democrats risk losing a key segment of the U.S. electorate for a generation.

Not only could that deny the Democrats a congressional majority for the foreseeable future, but it might even get Trump a second term.

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Legendary Investor Asher Edelman Says “I Have No Doubt” PPT Behind Market Rally

Legendary vulture investor Asher Edelman, the 1980s model for Gordon Gekko, strayed into what must’ve been uncomfortable territory for CNBC during an appearance on “Smart Money” when he discussed his view that the government’s “plunge protection team” is the only thing propping up the current market rally, and said he suspects that it has again been recently een intervening in the market to keep stocks at record highs.

Is the plunge protection at work? Legendary investor @AsherEdelman lays out the conspiracy pic.twitter.com/A3h7QyV1EC

— CNBC’s Fast Money (@CNBCFastMoney) May 23, 2017

Edelman simply notes that he doesn’t want to be in the markets right now because “I don’t know when the plug is going to be pulled.”

Few can explain the market’s recent resilience, holding near record highs despite weak economic data and intensifying geopolitical tensions. The main benchmarks have risen for the fourth straight day following last week’s “Trump Dump” despite a terror attack in the U.K., the worst soft economic data since February 2016, and surprisingly low trading volume.

@AsherEdelman: “I don’t want to be in the market because I don’t know when the plug is going to get pulled”

— CNBC’s Fast Money (@CNBCFastMoney) May 23, 2017

The “plunge protection team” was created by President Ronald Reagan one year after the stock market crash in 1987, when the president called for the creation of the “Working Group on Financial Markets.”

It’s believed – as the name would suggest and as has been profiled on countless occasions on this website previously – that the group’s mandate is to maintain stability in the market and head off any severe crashes like what was seen in 1987. It’s believed the group reports only to the president, though the head of the Treasury, head of the Securities and Exchange Commission and Federal Reserve Chairman are also involved. The team, according to Asher, steps in to execute trades on all exchanges when the market isn’t behaving as it would like, working only with big banks like Goldman Sachs Group and Morgan Stanley. 

“We have seen the most extraordinary lack of volatility in the VIX since Trump has been in office and it’s interesting the night he was elected you may recall the futures came down about 400 or 600 points.

 

You may also recall that the next morning they were even again. Watching plunge protection for years, I had no doubt that’s what happened.

That may have been the case in the 1980s, however in recent years the PPT is the collaboration of the NY Fed and Citadel, which are most aggressive during times of substantial market stress and selling, when intervention is needed to stop the downward momentum in prices.

Edelman says he believes one sign of TPP intervention is when a smaller, less-liquid stock suddenly rises late in the trading day.

We’ve noted in the past that there appears to be a rule against mentioning the team on CNBC – with guests routinely getting “Schiff’d” for doing so.

And once again, this time, the “theory” was treated with derision by his fellow hosts.

“I think we all have so many questions here I don’t think I know where to begin,” Fast Money host Melissa Lee said.

Some audience members were more enthusiastic.

I can’t believe @AsherEdelman just talked about the PPT on @CNBCFastMoney. Didn’t think anyone was allowed to talk about it. That was crazy.

— Hun (@sincerewoo) May 23, 2017

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Yuan Tumbles As Moody’s Downgrades China To A1, Warns On Worsening Debt Outlook

Offshore Yuan tumbled as Moody’s cut China’s credit rating to A1 from Aa3, saying that the outlook for the country’s financial strength will worsen, with debt rising and economic growth slowing. This leaves the world’s hoped-for reflation engine rated below Estonia, Qatar, and South Korea and on par with Slovakia and Japan.

“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government,” the ratings company said in a statement Wednesday.

And the most obvious reaction was Yuan selling.

 

Full Statement: Moody’s Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.

The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced. The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.

China’s local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3. The senior unsecured foreign currency shelf rating is also downgraded to (P)A1 from (P)Aa3.

China’s local currency bond and deposit ceilings remain at Aa3. The foreign currency bond ceiling remains at Aa3. The foreign currency deposit ceiling is lowered to A1 from Aa3. China’s short-term foreign currency bond and bank deposit ceilings remain Prime-1 (P-1).

RATIONALE FOR THE RATING DOWNGRADE TO A1

Moody’s expects that economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow, but not prevent, the rise in leverage. The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole.

RISING DEBT WILL ERODE CHINA’S CREDIT METRICS, WITH ROBUST GROWTH INCREASINGLY RELIANT ON POLICY STIMULUS

While China’s GDP will remain very large, and growth will remain high compared to other sovereigns, potential growth is likely to fall in the coming years. The importance the Chinese authorities attach to growth suggests that the corresponding fall in official growth targets is likely to be more gradual, rendering the economy increasingly reliant on policy stimulus. At least over the near term, with monetary policy limited by the risk of fuelling renewed capital outflows, the burden of supporting growth will fall largely on fiscal policy, with spending by government and government-related entities — including policy banks and state-owned enterprises (SOEs) — rising.

GDP growth has decelerated in recent years from a peak of 10.6% in 2010 to 6.7% in 2016. This slowdown largely reflects a structural adjustment that we expect to continue. Looking ahead, we expect China’s growth potential to decline to close to 5% over the next five years, for three reasons. First, capital stock formation will slow as investment accounts for a diminishing share of total expenditure. Second, the fall in the working age population that started in 2014 will accelerate. Third, we do not expect a reversal in the productivity slowdown that has taken place in the last few years, despite additional investment and higher skills.

Official GDP growth targets have also adjusted downwards gradually and the authorities’ emphasis is progressively shifting towards the quality rather than the quantity of growth. However, the adjustment in official targets is unlikely to be as fast as the slowdown in potential growth as robust economic growth is essential to fulfilment of the current Five Year Plan and appears to be considered by the authorities as important for the maintenance of economic and social stability.

As a consequence, notwithstanding the moderate general government budget deficit in 2016 of around 3% of GDP, we expect the government’s direct debt burden to rise gradually towards 40% of GDP by 2018 and closer to 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns (40.7%) and higher than the median of Aa-rated sovereigns (36.7%).

We also expect indirect and contingent liabilities to increase. We estimate that in 2016 the outstanding amount of policy bank loans and of bonds issued by Local Government Financing Vehicles (LGFVs) increased by a combined 6.2% of 2015 GDP, after 5.5% the previous year. In addition to investment by LGFVs, investment by other SOEs increased markedly. Similar increases in financing and spending by the broader public sector are likely to continue in the next few years in order to maintain GDP growth around the official targets.

More broadly, we forecast that economy-wide debt of the government, households and non-financial corporates will continue to rise, from 256% of GDP at the end of last year according to the Institute of International Finance. This is consistent with the gradual approach to deleveraging being taken by the Chinese authorities and will happen because economic activity is largely financed by debt in the absence of a sizeable equity market and sufficiently large surpluses in the corporate and government sectors. While such debt levels are not uncommon in highly-rated countries, they tend to be seen in countries which have much higher per capita incomes, deeper financial markets and stronger institutions than China’s, features which enhance debt-servicing capacity and reduce the risk of contagion in the event of a negative shock.

Taken together, we expect direct government, indirect and economy-wide debt to continue to rise, signalling an erosion of China’s credit profile which is best reflected now in an A1 rating.

REFORMS WILL NOT FULLY OFFSET THE RISE IN ECONOMIC AND FINANCIAL RISK

The authorities are part of the way through a reform program intended to sustain and enhance the quality of growth over the longer term, as well as to reduce the risks to the economy and the financial system posed by high corporate and, in particular, SOE debt. One related objective is to contain, and ultimately reduce, SOE leverage.

The authorities’ commitment to reform is clear. It is quite likely that their efforts will, over time, improve the allocation of capital in the economy. Over the nearer term, the authorities have taken steps to contain the rise in SOE debt and to discourage some SOEs from further domestic and external investment, particularly in over capacity sectors.

However, we do not think that the reform effort will have sufficient impact, sufficiently quickly, to contain the erosion of credit strength associated with the combination of rising economy-wide leverage and slower growth. In particular, in our view, the key measures introduced to date will have a limited impact on productivity and the efficiency with which capital is allocated over the foreseeable future.

For example, one key set of reforms is the program of debt-equity swaps which aims to lower leverage in parts of the SOE sector, transferring the associated risks to the banking sector. At present, we estimate that the value of swaps announced is a very small fraction — around 1% — of SOE liabilities. Moreover, there is very little transparency about the terms of these transactions or their likely impact on SOEs’ and banks’ creditworthiness.

Other measures intended to improve investment allocation include negative lists on investment in excess capacity sectors and the introduction of mixed ownership. The former will likely reduce the major losses on investments of the past. However, excess capacity sectors only account for a small proportion of total investment. Only limited improvement in the allocation of capital would result from such measures. Meanwhile, mixed ownership is at a very preliminary stage, having been introduced in only a few dozen SOEs, and on too small a scale for now to have any impact on productivity in the economy as a whole.

Looking beyond the corporate sector, the financial sector remains under-developed, notwithstanding reforms introduced to improve the provision of credit; pricing of risk remains incomplete, with the cost of debt still partly determined by assumptions of government support to public sector or other entities perceived to be strategic. And with increased scrutiny of capital outflows, the capital account remains largely closed. While that insulates the economy and financial system from global volatility, it also constrains the development of domestic capital markets by limiting the flow of inward and outbound capital.

Overall, we believe that the authorities’ reform efforts are likely, over time, to achieve some measure of economic rebalancing and improvement in the allocation of capital. But we think that progress will be too slow to arrest the rise in economy-wide leverage.

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