Leaders in Beijing learn to stop worrying and love the debt

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Workers wearing protective masks weld steel bars at a construction site in Huai'an, Jiangsu province. Photo: Reuters

The Chinese government’s campaign to reign in excess leverage in the economy may soon be scaled back, sources close to policy discussions are saying.

A policy blueprint for next year, set to be released on Wednesday, will not call for lowering the debt level, the sources reportedly said, but rather will just contain a pledge to control a further rise in borrowing. The scoop, published in the Wall Street Journal on Tuesday, reflects Beijing’s eagerness to keep growth rates high.

“Let’s face it,” one official involved in the policy discussions was quoted as saying, “it’s not realistic to reduce leverage when the whole economy relies on banks for financing.”

The shift represents a U-turn for Xi Jinping’s administration, which has made deleveraging a centerpiece of its economic policy in recent years, amid calls from the IMF to do so. It also comes after warnings this week from analysts that China will have to be cautious about further tightening.

Despite the IMF and other economists’ warnings, not everybody has been so concerned about China’s debt.

Former World Bank country director for China Yukon Huang says that overblown concern regarding China’s debt can be blamed on the lack of an appropriate framework for analyzing China. He wrote back in September:

Yet China is, in fact, different—not because it is immune to financial pressures, but because of the structure of its economic system. The more optimistic observers point out that most of China’s debt is public rather than private, sourced domestically rather than externally, and that household balance sheets are typically strong. But neither the optimists nor the pessimists recognize that, a decade ago, China did not have a significant private property market. Once that market was created, credit surged into establishing market-based values for land—whose value was previously hidden in a socialist system. The fivefold increase in property prices over the past decade is the consequence.

Asia Times columnist David Goldman wrote in a similar vein last October that China’s debt is largely confined to sectors that can support it:

…a great deal of Chinese corporate indebtedness should be viewed as “public works” investment by the Chinese state. Certainly, there are aspects of the increase in indebtedness that recall Japan’s dependence on public works spending as a channel for economic stimulus. There are inefficiencies to be made, for sure, but by and large the debt sits where the economy best can support it.

After the 19th Party Congress, held in October, many expected Xi Jinping’s increased political capital would give him more leeway in doubling down on the deleveraging campaign, while accepting slower growth. It appears Xi may not want to push his luck after the surprisingly strong economic growth in 2017.

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