Liu Jun: China’s Economy Has Resilience to Overcome Vulnerabilities

2018-04-13 IMI

This article first appeared in Financial Times on March 10, 2018. Liu Jun is executive vice-president, a member of the China Investment Corp.’s executive committee, and a member of IMI Academic Committee. His opinions are entirely his own. The year of the dog has dawned, but the Chinese stock market slump in early February did nothing to enhance the festive mood. Although the Shanghai and Shenzhen stock indices have bounced back somewhat since then, the sudden retreat raised jitters in some quarters that China’s economy might be heading for a tumble. But dire forebodings are overblown. The external environment has never been more favourable since the 2008 recession. The locomotive US economy combines rapid growth and low rates of unemployment, not to mention the New York stock index which, although down from its January records, has rebounded from February lows. Similarly, Europe appears fairly robust with its debt crisis consigned to the rear view mirror and the European Central Bank considering whether to pare back quantitative easing. In the US, a key concern is wage growth figures that come in at above expectations, eliciting fears over inflation and possible hawkish moves by the US Federal Reserves. This could create turbulence in the stock market but a crash would be unlikely because of the fundamental strength of the US economy. These realities should convince people that there is little clear-cut evidence of a deterioration in global economic conditions. China too is enjoying a rapid phase of growth. Even though there are several grey rhinos stalking the imaginations of some investors these are all, in fact, mere phantoms. Let’s unmask them one by one. The main concerns in China’s domestic economy revolves around real estate overheating, the corporate debt burden, high leverage in the financial system and non-performing assets and industrial overcapacity. Real estate investment in 2017 was close to Rmb11tn, up 7 per cent compared to 6.9 per cent in 2016, according to the National Bureau of Statistics. The average house price by the end of 2017, according to Wind, was Rmb13,967 per square metre, 7.15 per cent up year-on-year but far below the 2016’s growth rate of 19 per cent. Housing sales grew by 13.7 per cent year-on-year, much slower than 2016’s 34.8 per cent. Such statistics suggest not a downward spiral but a managed slowdown. According to the IMF, China’s debt-to-GDP ratio—borrowing by governments, non-financial companies, and households from both banks and bond markets— rose to about 254 per cent in 2016, with the government debt ratio at 44 per cent, the household ratio at 44 per cent and non-financial companies’ ratio at 165 per cent. However, if the national savings ratio of about 46 per cent (with corporates at 17 per cent, the government at 6 per cent and households at 23 per cent) is taken into account, the overall debt serviceability is acceptable although not healthily sustainable. As for the financial system’s increasing leverage — brought about in particular through the issuance of off-balance-sheet wealth management products or inter-bank transactions — a resolution to this gigantic mess needs to be achieved over the long-run. According to the Bank for International Settlements (BIS), the size of the outstanding shadow savings instruments in 2016 stood around 77 per cent of GDP or Rmb57.3tn (which is broken down into wealth management products at Rmb23.1tn, trust products at Rmb20.2tn, entrusted loans at Rmb13.2tn and P2P loans at Rmb0.8tn). No matter which aspect of the shadow finance problem is tackled first by regulators, there is an official consensus that this problem will take time to resolve. Nevertheless, when compared to the overall size of China’s financial system, an inherent resilience becomes clear. Total financial assets of Rmb307tn (broken down into Rmb59tn in equity, Rmb75tn in bonds and Rmb173tn in deposits, according to Wind) provide an ample buffer as regulators tighten curbs around these lightly-regulated products. How about non-performing assets, the old Achilles heel? According to CEIC, non-performing loans (NPL) account for 1.74 per cent of a total Rmb1.7tn in lending. Some China watchers may doubt the truthfulness of the NPL ratio itself. However, the financial institutions’ profit accumulation and ongoing reinforcement of their capital base can without doubt prevent old troubles from turning into new mistakes. Last but not least comes industrial overcapacity. Transforming from a manufacturing-oriented to technology-driven economy is a long journey. A gradual improvement in profits and productivity demonstrates the wisdom in this shift toward quality-oriented growth against the previous emphasis on scale. So, when subjected to analysis, such phantoms turn out to be largely hollow. They should then be set against an array of positive factors from which the Chinese economy is deriving strength and momentum. The substantial strides China is making in technological upgrading and the concurrent acceleration in innovation driven by a massive research and development effort is one sterling attribute. The steadfast resolve of the central government to switch gears toward a more efficient and environmentally-friendly economic trajectory is not only fostering green industries but also reinforcing social cohesion. The fortification of the capital bases and balance sheets of financial institutions is enabling more capital resources to be directed toward the real economy. The cooling real estate sector, with more emphasis on rental housing, is returning growth to a more rational plane. A powerful initiative to embrace digitalised and AI-enabled industrialisation is set to drive the development of a new generation of products. In short, China’s economy is set to continue its development in the global economy guided by market economy principles. It is most unlikely that it will fall off a cliff – a prospect that would throw the whole world into jeopardy.

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Liu Jun: China’s Economy Has Resilience to Overcome Vulnerabilities

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