Simply put, it takes China too many units of debt to generate a unit of growth. The longer this continues, the greater the doubts as to whether the incremental income generated in the future will prove sufficient to meet the ballooning debt service obligations. Should such circumstances prevail, both actual and potential growth would be negatively affected over the longer-term, also undermining the political legitimacy of the governing Communist Party.
Rather than shine a spotlight on a fragile financial system, Zhou's warning should be seen as emphasizing the need to accelerate -- and render more effective -- the broader middle-income economic development transition that China is currently undergoing. It is a message that the politicians, rather than financial market participants, need to hear, internalize and respond to.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco.
This column was provided by Bloomberg News.