Chinese President Xi Jinping’s (習近平) top economic adviser earlier this year commissioned a study to see how China could avoid the fate of Japan’s epic bust in the 1990s and decades of stagnation that followed.
The report covered a wide range of topics, from the Plaza Accord on currency to a real-estate bubble to demographics that made Japan the oldest population in Asia, according to a person familiar with the matter who has seen the report.
While details are scarce, the person revealed one key recommendation that policymakers have since implemented: The need to curtail a global buying spree by some of the nation’s biggest private companies.
Photo: Bloomberg
Chinese Communist Party (CCP) leaders discussed Japan’s experience in a politburo meeting on April 26, according to the person, who asked not to be identified as the discussions are private.
Chinese state media came alive afterward, with reports trumpeting Xi’s warning that financial stability is crucial in economic growth.
Then in June came a bombshell: reports that China’s banking regulator had asked lenders to provide information on overseas loans made to Dalian Wanda Group Co (萬達集團), Anbang Insurance Group Co (安邦保險集團), HNA Group Co (海航集團), Fosun International Ltd (復星國際) and the owner of Italian soccer team AC Milan.
While the timing of the requests is unclear, other watchdogs soon issued directives to curb excessive borrowing, speculation on equities and high yields in wealth-management products.
Jim O’Neill, previously chief economist at Goldman Sachs Group Inc and a former UK government minister, said Chinese policymakers are constantly looking to avoid the mistakes of other countries — and Japan in particular.
“You see it in repeated attempts to stop various potential property bubbles so China doesn’t end up with a Japan-style property collapse,” O’Neill said in an e-mail. “There does appear to be some signs that some Chinese investors don’t invest in clear understandable ways, but they wouldn’t be the only ones where that is true.”
On Tuesday, Chinese Vice Minister of Commerce Qian Keming (錢克明) told reporters that Chinese companies must be prudent in outbound investment in the entertainment, sports, hotel and property sectors.
The moves reflect concerns that China’s top dealmakers have borrowed too much from state banks, threatening the financial system and ultimately the CCP’s legitimacy to rule — a key worry ahead of a once-in-five-year conclave this fall that would cement Xi’s power through 2022.
The study was commissioned by Liu He (劉鶴), whose role as director of the office of the CCP’s top economic policy committee makes him one of Xi’s most senior advisers, the person said.
It provides at least one key reason for Beijing’s moves to rein in outbound investment that jumped to a record US$246 billion last year.
The impact has been swift: Acquisitions abroad tumbled 55 percent in the first six months from the same period last year, according to data compiled by Bloomberg.
Beyond stemming China’s deal flow, the study also recommended a new law to spell out the rules for overseas investments and tighter scrutiny by regulators on the long-term viability of overseas investments — particularly return on assets — to ensure that risks do not blow up.
It likened Chinese companies to speculative retail investors looking for quick returns on the stock exchange.
The study said China is in danger of emulating Japan in the 1980s, when it had become a manufacturing powerhouse after years of near double-digit economic growth.
It cited Japanese purchases of everything from Pebble Beach golf club to Columbia Pictures to Rockefeller Center in New York as examples of what could go wrong when companies have a strong currency and the ability to borrow cheaply against surging land valuations at home.
China is moving to ensure its companies do not repeat those mistakes.
Still, even as authorities look to deleverage the economy, the CCP remains committed to ensuring annual growth of about 6.5 percent this year to achieve a promise of building a “moderately prosperous society” by 2020, with GDP and income levels double those of 2010.
Whether they can both hit that target and curb financial risks is an open question.
“The deleveraging push is serious when it comes to limiting the potential for systemic financial stress in the short term,” said Logan Wright, Hong Kong-based director of China markets research at Rhodium Group LLC.
“But it is less clear that Chinese authorities are truly prepared for the longer-term economic consequences of a financial system growing at a much slower rate in the future,” he said.
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