Heed the warnings on China’s economy
Once the 19th Communist Party congress is out of the way in the autumn, leaders must address the need for meaningful reform, improve the environment for foreign investors and restore faith eroded by political concerns that have seen capital flowing out of China
If the mainland economy has outpaced its overall 2017 growth target in the second quarter; if the International Monetary Fund has revised upwards its growth predictions for this year and next; and if China is sitting on about US$3 trillion in reserves, why are the IMF and Beijing both concerned about debt? For the second time in a month, the IMF has warned about ballooning debt, saying it is on a dangerous path that raises the risk of a sharp slowdown. President Xi Jinping has cautioned that financial stability is crucial to national security, prompting a national financial work conference to launch a stability coordinating committee whose terms of reference include excessive credit, rampant shadow banking and lax oversight. A central bank official with responsibility for financial stability has identified seven risks “on the rise” – including bad loans, liquidity management, shadow banking and government debt. The Politburo says it will tackle local government debt piles and move to shore up the confidence of foreign and private-sector investors.
Not all the experts agree with this downbeat tone. But evidence of official concern is to be found in action to rein in companies that have gone on a credit-fuelled buying spree for trophy foreign assets like entertainment firms and hotels. The authorities have blocked deals and warned banks to curb lending. The extravagant expansion is the legacy of 10 years of stimulatory policies following the global financial crisis. Because China remains a semi-market economy, the state banks lend to non-state-owned companies on the basis of connections, and not so much on assessment of credit worthiness and business plans. Over the past few years, this has enabled globally acquisitive conglomerates like Anbang Insurance, Fosun, Dalian Wanda and HNA to buy a lot of overseas assets, typically using a targeted asset as collateral for credit from a mainland bank. This effectively transfers assets out of China and leaves the risk in China with the banks.
These deals add little to the mainland economy. But in the process, the companies grow so big and so indebted that they become a risk to the economy if allowed to fail – shades of Western banks that had to be bailed out in the global financial crisis – giving rise to the term “grey rhinos”, for threats that can easily get away from regulators.
With the government exercising so much control, a sudden collapse – a Lehman Brothers moment – is less likely than a gradually deteriorating situation, which the authorities are now trying to head off. Once the 19th Communist Party congress is out of the way in the autumn, party leaders must address the need for meaningful reform, improve the environment for foreign investors and restore faith eroded by political concerns that have seen capital flowing out of China.