miércoles, 18 de marzo de 2015

miércoles, marzo 18, 2015
March 12, 2015 7:00 pm
 
The contradiction at the heart of China’s new growth target
 
Rising debt levels threaten both financial and economic stability, writes George Magnus
 
 
China set a lower growth target of “about 7 per cent” at last week’s session of the National People’s Congress. It was a signal that, while the double-digit growth years may be over, Beijing remains confident that the world’s biggest economy will continue to enjoy healthy rates of expansion. The truth is that outcomes will more likely be determined by an important contradiction in economic development strategy than any official pronouncements.
 
According to a report presented by Premier Li Keqiang, China needs to find the “right balance between managing debt and maintaining steady growth”. At first this seems sensible enough; in reality there is a fundamental inconsistency between the objectives.

China’s economic expansion is in­creasingly dependent on high rates of credit creation. The pursuit of 7 per cent growth, therefore, will entail a further rise in the share of credit as a proportion of national income. The debt to gross domestic product ratio has nearly doubled since 2008 — and would do so again over fewer years because the level of debt is higher while GDP growth is lower. Rising debt levels, together with overcapacity in property and several important industries and mounting deflationary pressures threaten both financial and economic stability.

Management of debt, on the other hand, requires curbs on credit creation, and a new willingness to tolerate defaults and restructuring among those generating the bulk of borrowing. These include shadow financial system lenders, property developers, local government finance vehicles and state-owned enterprises. To wean the economy off credit would also knock at least a couple of percentage points off GDP growth. This need not be disastrous but there is no political appetite for it because high rates of growth and job creation are a vital part of the social contract.
 
Officially these objectives can be reconciled via deep economic reforms. Yet the reforms that are immediately relevant to the economy — financial liberalisation, local government and state-owned enterprise reforms — are also among the most problematic. By increasing credit creation, financial and local government reforms are actually exacerbating the problem of managing debt by developing new forms of credit creation and borrowing at a time when policy should be leaning the other way.

Restructuring the sprawl of state-owned enterprises is not consistent with hopes for more assertive economic rebalancing as it is largely driven by politics and not aimed at realising higher productivity and efficiency.
Financial liberalisation is less politically contentious. Rules on deposit rates have been eased, new products and companies have evolved to intermediate savings, and a vibrant shadow finance sector has emerged. But this has also fostered a surge in lending of often doubtful quality, funded by short maturity and high yielding deposits — the antithesis of taming credit expansion.

Fortunately the liberalisation of capital flows is proceeding slowly and selectively, favouring foreign investors keen to move capital into China. Outward liberalisation, which would permit residents to move capital abroad, is still viewed with suspicion. Yet boosting the inward flow of capital hinders the task of curbing credit creation.

After encouraging local governments in the wake of the financial crisis to borrow heavily, Beijing is trying to restrain the entities that sprang up as the main borrowing agents. But instead of establishing a legal framework to define the economic functions of local governments and focus their spending, Beijing is simply encouraging them to refinance existing debt and raise money through the new municipal bond market.

Hopes of reform of state-owned enterprises were raised earlier this year when it was announced that the sector would be a focus for the anti-corruption campaign that has become a hallmark of the presidency of Xi Jinping. But the target is to reinforce party influence in the iron triangle of party, state and business — not to establish growth-oriented outcomes. Instead, the government will continue to rely on traditional public investment measures, an easing in property restrictions and lower interest rates and bank reserve requirements.

Beijing’s choice to manage debt and maintain 7 per cent growth is in reality no choice at all. The two goals are in contention. In an ideal world, the government would resolve to manage debt down, by restraining the financial sector and local governments, accept lower growth and its consequences, and simultaneously accelerate reforms to build a new growth model. In the real world, politics are kicking the proverbial can down a shortening road.

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