Tuesday, 28 September, 2021
E-paper

China’s debt reduction like putting the ‘genie back in the bottle’, but can it succeed to aid the economy?

  • Sun Online Desk
  • 9th August, 2021 09:47:50 PM
  • Print news
China’s debt reduction like putting the ‘genie back in the bottle’, but can it succeed to aid the economy?
Infrastructure projects are still being built in major Chinese cities – like the second phase of the mass transit network Foshan city in Guangdong province costing 77.21 billion yuan (US$12 billion) – but Beijing is now setting the bar higher. Photo: Xinhua

Popular News

China has long relied on the old playbook of investing in infrastructure projects to boost its economy, particularly its high-speed railway network that is the largest in the world. And Beijing even said at the start of the year that its high-speed rail network could nearly double in size over the next 15 years.

But if anything highlights Beijing's commitment to reducing its historically high debt levels that are a result of a decade-long borrowing spree, it is the postponement, or in some cases failure to gain approval, of a number of costly high-speed railway and underground projects since the start of the year.

Projects are still being built in major cities – like the second phase of the mass transit network Foshan city in Guangdong province costing 77.21 billion yuan (US$12 billion) – but Beijing is now setting the bar higher.

This has been promoted by rising risks of defaults by local governments, which have seen their revenue plunge due to the economic effects of the coronavirus last year.

Beijing is well aware that high levels of debt reduce leeway for the economy to grow and pose a significant risk to China’s financial system and economy.

These efforts to reduce debt are expected to put downward pressure on Chinese growth in coming years, meaning without the option to turn to a one-size-fits-all strategy to cut back debt growth given the disparities in regional economies, the government has to tread carefully with its remedies.

But Michael Pettis, a professor of finance at Peking University, expects China’s debt growth this year will be among the lowest of the past decade.

“Mainly because Beijing seems to be reining in wasteful investment in infrastructure and property,” he said.

“If it were not wasteful, debt would have gone up in the past decade, but gross domestic product (GDP) would have gone up even more, so that the debt-to-GDP ratio would not have deteriorated so dramatically. I still expect the debt-to-GDP ratio, however, to rise a little in 2021.”

While China’s economy has recovered strongly from the impact of the coronavirus, its debt surged to 280 per cent of GDP in 2020, up from 255 per cent of GDP in 2019, according to the People’s Bank of China (PBOC).

And the total size of the debt pile is not yet clear, given moves by local governments to borrow outside their budget, resulting in so-called hidden debt.

“Property loans and hidden local government debt still remain potential threats to our financial stability. We call them grey rhinos,” said Wang Zhaoxing, former vice-chairman of China Banking and Insurance Regulatory Commission last month, referring to a problem that is well known but not adequately addressed.

Source: www.scmp.com