While the Chinese economy grew at an annual rate of about 6.7 percent in recent years, its potential economic growth has been on the decline, falling by 0.1 to 0.2 percentage points annually.
From 2013 to 2015, the central government formulated several major economic strategies. Top leaders said in 2013 that the Chinese economy was undergoing a “triple transition.” In 2014, the economy was said to have entered a “new normal.” In 2015, supply-side structural reform was proposed.
However, with no fundamental changes seen in the pursuit of economic expansion, the debate over growth rates still had an impact on economic policies, as many still believed in boosting GDP through stimulus plans. This thinking explains why China’s leverage ratio has continued to rise since 2012.
The IMF and the Bank for International Settlements said in a 2013 study of financial crises that the credit-to-GDP ratio had exceeded its long-term trend by 10 percent in the three years preceding 50 percent of those crises and in the five years preceding 75 percent of these crises.
But China has exceeded the threshold since 2012, with its credit-to-GDP gap already above 20 percent. The international community has been concerned about economic developments in China and worried about a “Minsky Moment,” and that in turn has affected the confidence of some Chinese companies, especially private ones.
In 2013 and 2015, the Chinese economy saw problems such as liquidity crunches, stock market plunges and capital outflows. However, since 2016, the economy has resumed steady growth, accompanied by a continuously optimized structure, the moderate reduction of financial risks and a slightly lower leverage ratio. Several factors have contributed to these macroeconomic improvements.
First, supply-side structural reform has achieved results. Second, the proactive monetary and fiscal policies implemented since 2015 have provided support to investment. Third, export demand has picked up due to gradual recoveries in the US, EU, Japan and other economies amid stable global financial markets, rising commodity prices and recovering international trade.
While China’s economic performance has stabilized to a certain extent, such problems as overcapacity, real estate bubbles and expanding local government debts persist. So do problems related to shadow banking, internet finance and illegal fundraising. These problems have pushed up the macro leverage ratio in China, which could seriously affect the country’s financial stability and economic development.
In light of this situation, the central government took strict measures in four areas in 2017. Strict oversight was applied to the financial sector; strict curbs were put on the real estate sector; strict controls were adopted for local government debts; strict standards for environmental protection were executed.
As a result of these steps, investment in infrastructure and real estate is expected to have declined moderately in 2017.
Meanwhile, short-term liquidity may be somewhat volatile and financing costs may be relatively high. Also, tighter environmental controls may lead to increased production costs for manufacturers. In this sense, goods prices will rise in general, with the nominal GDP growing relatively fast and the leverage ratio basically stable.
Against this backdrop, there are three suggestions for China’s macro control policy in 2018. First, China should maintain its expansionary fiscal policy, particularly in regard to increasing special-purpose debt issues by local governments to maintain the necessary investment for infrastructure. Second, monetary policy should be neutral with a bias toward tightening. Third, the yuan’s exchange rate should be properly devalued in 2018, while authorities should tighten capital controls to strengthen the independence of China’s monetary policy.
As the economies of the US, EU and Japan recover and the US tightens monetary policy, China should use the opportunity to appropriately devalue its currency against the US dollar, the euro and the yen, with the aim of supporting exports and maintaining general economic stability to create conditions for domestic structural adjustment and deepening reform.
The biggest challenge facing China in the years to come is to stabilize its GDP growth at about 6.3 percent to create the foundation to achieve the goal of building a comprehensively prosperous society. The government should also guard against and address financial risks, putting the leverage ratio under control. It is also necessary to improve the quality and efficiency of economic growth.
To achieve a balance among the goals of stabilizing growth, preventing risks and improving quality, a three-year plan is needed that should include the liquidation and debt resolution of “zombie” companies, the disposal of implicit local government debts and the reform of financial institutions, financial supervision, capital injections and financial aid.
Source: Global Times