China must turn off the taps of credit-driven growth to avoid a financial system crisis in the face of rising bad loans and other risks, the Chinese Communist Party’s official mouthpiece newspaper said yesterday, citing an unnamed “authoritative” source.
The prominent article, in question-and-answer format, started on the front of the broadsheet paper and took up the entirety of page two.
The Chinese government is trying to retool the economy away from the investment and export-led growth of the past to one more led by consumer demand, and reform lumbering, loss-making state-owned enterprises to make the sector more efficient.
However, the transition is proving bumpy, raising fears of a hard landing, and global markets have been alarmed by slowing expansion in the world’s second-largest economy.
Attempts to address the slowdown in the first quarter of this year — when growth slid to 6.7 percent — were largely driven by investment, the People’s Daily quoted the source as saying, putting more financial pressure on some local governments.
Analysts said the comments could be a signal that Beijing is to rein in monetary stimulus efforts.
“A tree cannot grow in the air,” the source said, arguing against raising debt further.
“Further leverage must not be added to push up growth, nor does it need to be,” the interviewee added, warning of a possible crisis as high debts “will definitely bring about high risks.”
“A system financial crisis could be triggered if no good controls are implemented, leading the economy to contract and even household savings to evaporate,” the source said.
It is the third time in less than a year that the People’s Daily has cited “an authoritative person” to discuss top-level economic policies.
China’s news portal Sina has previously said that such an “authoritative source” in similar People’s Daily articles could be a high-ranking government official, such as the head of China’s top economic planning agency the National Development and Reform Commission, or a respected scholar who participated in major economic policymaking.
“While the anonymity has been protected, the views expressed in these articles did have a large impact in China,” Nomura economists said in a note.
The report implied that future monetary easing “may be more cautious and that the government may try to hasten the pace of reforms,” they said, evidence that China’s “debt-fueled rebound in investment growth will be short-lived.”
China’s growth will continue to slow, the source said, as sluggish demand and overcapacity are “unlikely to turn around fundamentally in several years.”
Boosts from credit expansions have declined and the government must “completely abandon the delusion” of trying to stimulate growth by loosening money supply, added the source.
Instead authorities should accelerate reforms, stop lending to “zombie companies” to reduce overcapacity, allow migrant workers to settle in cities to expand demand and further cut taxes, the source said.
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