China can’t fix its financial problems by debt cutting alone, economists say
Overheating property markets and the ballooning financial services sector are symptoms of structural imbalances that need addressing
The push for real economic reforms remains a key challenge facing President Xi Jinping during his second term, as structural improvements beyond debt reduction are needed to contain China’s financial risks, chief economists of China’s top banks said in Beijing on Thursday.
The recent top-down deleveraging campaign to reduce debt “is necessary”, said Ren Zeping, chief economist at Founder Securities, during a financial forum as part of the 20th Beijing International High-Tech Expo.
“However, if China does not improve the economic return in the real economy as soon as possible, the capital will continue to flow to the property and financial sectors, triggering more risks,” he said.
Zhang Ming, chief economist with Pingan Securities shared Ren’s view, saying reform in the real economy is “severely lagging”.
Low efficiency and low returns in the real economy is pushing liquidity into the financial sector, adding to risks, Zhang said.
“The first three years into the second term of each Chinese leadership has been a window to push forward significant reforms,” Zhang said.
“After the 19th party congress [due this autumn], it will be a test of the wisdom and determination for the current leadership whether they can clear the obstructions of interest groups that has deterred major reforms in past years.”
China has been injecting fresh capital into the economy since the 2008 financial crisis, while the US and Euro-zone were forced to carry out deleveraging.
As a result of loose monetary conditions and shadow banking activities, large amounts of
capital have flown into sectors like property and financial services, squeezing profitability in other areas of the economy, Ren said.
“Economic reforms are lagging behind in terms of improving the efficiency of state-owned enterprises (SOEs) to optimise land ownership structure,” he said.
If Beijing does not accelerate economic reforms, capital will continue to flow into sectors that add little real value, he added.
China’s financial sector has grown to represent 9.2 per cent of the economy, up from 5 per cent in 2007, dwarfing the US at 7 per cent, and Japan at 5 per cent, the official Chinese Securities Times reported last year.
China’s total debt rose to a record 237 per cent of gross domestic product in the first quarter, far outpacing its emerging-market counterparts. The US has a total debt to GDP ratio of 300 per cent.
Still, analysts are concerned about the rapid pace of China’s indebtedness at a time of slowing growth.
US rating agency Moody’s Investors Service on May 24 downgraded China’s credit rating to A1 from Aa3, and changed its outlook to stable from negative, citing concerns over debt growth.
“When the US government was pushing for deleveraging after the financial crisis, they also introduced a slew of policies improving economic efficiency, including tax reduction,” Ren said.
“The real level of financial risk is not decided by the leverage ratio. It is decided by whether the cash flow and interest rate of the real economy could cover debts. China’s problem cannot be cured by pure deleveraging,” said Cao Yuanzheng, chief economist at Bank of China during.