China must lower GDP expectations and push SOE reform, says S&P Global Ratings economist

The Chinese government should manage downwards the country’s expectations for gross domestic product growth and push forward reforms at state-owned enterprises, both key for addressing China’s mounting credit and debt problem, according to Paul Gruenwald, the chief economist at S&P Global Ratings.

“GDP growth has had a very, very special status in China. It is almost like an expectation anchor for the whole economy,” Gruenwald told a forum in Hong Kong on Thursday, the same day China reported a 6.9 per cent expansion in GDP for 2017. The result topped the official target as well as 2016 growth.

“But that [GDP] number needs to be managed down,” he said, minutes before the announcement. Gruenwald worked as deputy chief of the China division at the International Monetary Fund before joining S&P Global Ratings. The agency cut China’s sovereign credit rating by one notch last year for the first time since 1999, citing risks from China’s soaring debt levels.

A continuation of reforms at state-owned enterprises was also needed, for addressing China’s credit problem, said Gruenwald.

“Most of the debt is from the corporate sector, especially the SOEs. They are very big and are the ones who are soaking up the credit,” he said.

Gruenwald said the market should also play an essential role besides the government in containing excessive borrowing.