Sat, Feb 10, 2018 - Page 9 News List

Outlook on China’s economy seems darkest from a distance

By Enda Curran and Ye Xie  /  Bloomberg

What is more, China is a vast, multiregional economy — not an island. That means it can keep posting world-beating growth even when some regions do turn down, as happened in 2016 and early last year when the industrial northeast slowed as the government pushed through an economic rebalancing that promotes consumption and services.

As China enters the lunar Year of the Dog, the gloomy bears have said it is unlikely that plans to curb loans and credit expansion can succeed without denting growth.

Mark Williams, chief Asia economist at Capital Economics in London, for instance, said government statistics have inflated GDP readings. He said China’s GDP growth would slow to 4.5 percent this year, whereas the more than 100-strong research team at China International Capital Corp (CICC), the nation’s first Sino-foreign investment bank, thinks the economy could actually accelerate to 7 percent.

CICC downplays the negative impact of total borrowing, which has risen to more than 2.5 times China’s GDP and is generally seen as the No. 1 risk factor facing the economy.

The investment bank argues that both the state sector and households have more than enough cash on hand should trouble strike. In addition, the most indebted sector — corporates — is sitting on cash equivalent to about 40 percent of China’s debt, CICC said.

That, according to Liang Hong (梁紅), the company’s chief economist, means that while government reforms to cut debt levels in China are important, they need not translate into negative growth.


Another point missed by the Connecticut-set mentality is this: China’s debt is largely self-funded and should remain that way as long as the nation hangs on to a healthy current account surplus, said Michael Spencer, global head of economics at Deutsche Bank AG in Hong Kong.

“Hedge funds in New York have been saying for seven years it’s going to be a crisis, but it clearly hasn’t been the case,” he said. “China is not investing New York hedge-fund money. It is investing Chinese home savings.”

That is not to say the China bears do not have legitimate concerns.

The nation’s total debt from the government, households and non-financial companies reached 256 percent of GDP in June, already surpassing that of the US (250 percent), the Bank for International Settlements said.

That is up from 146 percent a decade ago and it marks a faster pace of debt accumulation than occurred in the US during the period leading to the housing crisis.

Even officials in Beijing are taking the possibility of asset-price collapse seriously: Outgoing People’s Bank of China Governor Zhou Xiaochuan (周小川) in October warned of the risk of a debt-induced Minsky Moment, and Xi has prioritized financial stability through his second term in office.

Confidence in the ability of China’s policymakers to manage the economy wavered in 2015, when an epic stock market crash and bungled exchange rate reform sent global markets into a tailspin. Yet, more than two years on, the clear takeaway from that episode is the need to distinguish market ructions from real economic activity: Economic growth largely held up through that crisis as authorities used levers such as capital controls to stem the fallout.

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