China to see lower debt level as ‘supply-side reform’ bears fruit
Beijing may raise budget to resettle workers after lay-offs
China is likely to have a taste of initial success in its “supply-side reform” in the next three to five years with a lower debt level and reduced risk in the banking system, said Jing Ulrich, managing director of JP Morgan Asia Pacific, on Monday, even as some say the reform lacks details.
“President Xi [Jinping]’s supply-side reform will bear fruit, and it will reduce the debt level in China,” Ulrich said.
Under China’s reform initiative, companies in the traditional industries were encouraged to reinvent themselves to become more efficient with innovation in technology, she added.
Also on Monday, China’s finance minister Lou Jiwei said it was “impossible to predict the scale of lay-offs” in the drive to reduce overcapacity, and the country’s fiscal spending budget might be raised beyond 100 billion yuan to resettle workers.
Some analysts have challenged the reform, saying it lacked specific details.
“The issue is more than just about money,” said Iris Pang, senior economist with Natixis. “What if the local government is unable to handle too many lay-offs? Who to report to if a zombie company closes down and leaves behind a large amount of non-performing loans? The central government needs to issue a coordination plan and help local governments not only push forward the plan, but also maintain stability ... But we have not seen all these.”
Ulrich said the reform process would “bear Chinese characteristics and will not have specific guidelines” like those in the US and Britain, adding that the reform initiated by Xi had different dimensions from those that bore the same name led by former Western leaders including Ronald Reagan and Margaret Thatcher in the 1980s, which were essentially about cutting taxes.
Xi has been reiterating the urgency to tackle oversupply and force out “zombie companies”, which refer to companies that generate zero profit while wasting capital and resources, after he came up with the term “supply-side reform” by the end of last year.
During a meeting with senior party members earlier this month, he said he was not completely happy with the reform process. “Some local governments haven’t started vigorous implementation yet, and some efforts are missing the point,” he was quoted by Central China Television as saying.
Ulrich said the weakest link in China’s debt portfolio remained the corporate sector, whose debt pile amounted 120 to 150 per cent of the economy, based on various calculation measures, much higher than debt accumulated by the central government and the household sector.
But she said the problem could be eased if Beijing pushed forward the initiative to cut overcapacity while developing the tertiary industry, in particular the technology, entertainment and health-care sectors.
Similarly, pressure facing banks was also controllable, Jing said.
“Don’t forget China’s banks are funded with retail deposit that carries a very low interest rate, and it is very sticky,” she said.
She also expects Beijing’s monetary policy to stay neutral for the rest of this year while the red-hot housing market and investment frenzy will not cool down.