China’s economic outlook and debt issues-A short analysis of IMF report of 15th August 2017

Taken from out blog’Brink of economic thoughts”

China’s economic outlook and debt issues-A short analysis of IMF report of 15th August 2017

IMF Executive Board concluded 2017 Article IV in Consultation with the People’s Republic of China. It concluded that sustainable growth path continues and has advanced across other domains. It is necessary to understand the issues related to China’s economy given a fact that its interconnections affect the global economy on a large scale. Given the fact that China has come up with a unique concept like Belt road Initiative, which provides it an access to not only Europe but world markets, either by land ways or seaways. It has to be necessarily understood that why economic thinkers have continued to warn about the debt problem of China. It can be referred as a problem not of the Chinese government or state owned enterprises {SOEs}, but of the Chinese public sector companies.

 

What is the need to study Chinese economy-Its positive sides and ill practices?

 

Ken Rogoff  had said last year in 2016 that slowdown of the Chinese economy is the biggest threat to the world. China is today working on ground with 21st century maritime silk route. It has started developing infrastructure in and around Asia for successful completion of the Belt road Initiative. This belt road initiative is expected to bridge the gap in field of infrastructure not only in Asia pacific, but also in eastern and central Europe. It has not only futuristic plans to expand road networks in east Europe, central Asia and east Africa but also the plans to foster collaboration in the region of South China Sea and Indian Ocean through extensive use of water bodies. China has been pioneering the Asian Infrastructure Investment Bank, established in 2016 having large chunk of investment to carry out in this region .Reportedly Chinese government was frustrated with the slow growth in investment in this region and wanting to have a greater input in IMF, World Bank and Asian Development Bank .China has initiated the Silk Road fund. There had been issues with underinvestment in infrastructure in industrialized world post 1980 and China in this time silently attained specialization in land transportation and civil engineering works .This dream has the potential to change not only the European economic order but also the international geoeconomics.This being on positive side.

But on negative side China is blamed of dumping. Donald Trump has ordered review of Chinese trade practices. This is with regards to the Intellectual property and may even go up to an extent of trade sanctions. Nations have blamed China of seeking trade benefits while trading in their nation, but not returning the same gesture while operating in Chinese lands. It thus becomes necessary to estimate about the Chinese economy amidst the conflicts which it faces with its neighbors on the disputed issues.

 

IMF report on China

 

Growth has remained strong in China but at the same time the sets of vulnerability are very high.GDP growth registered has been as high as 6.5 % in last few years. Demand and supply side growth parameters have been strong in China which is driven by local enhanced consumption and services sectors. Due to steps taken in industrial sector industrial profits have grown up. Chinese authorities have taken steps in last 18 months to stabilize the exchange rate expectations. China officially maintains a managed floating rate arrangement. From December 2015 China has been publishing RMB effective exchange rate index.

 

Ahead of its full party congress scheduled later this year Chinese economy is well poised now.IMF authorities believe that China will be able to meet its output target but public and private debt will also increase. There are interesting observations made about the Chinese economy. One among says that in case what may transpire in case trading partners raise barriers?  E.g. If  USA allows increase of 10 % In tariffs, the GDP of China may fall by 1 %.Growth however would be sustainable although it may be lower than expected.IMF authorities have although disagreed with it due to brighter growth prospects.

 

Low consumption and high national savings have translated into lower welfare for Chinese peoples and excessive debts. China will have more elderly population and less working population from 2015 to 2050.Demographic changes will have an impact on the national savings over time. State owned enterprises have been less profitable as compared to private players thus reducing the economy wide productivity. It is thus expected that the Reforms have to be accelerated to enhance productivity for State owned enterprises.

IMF authorities have marked that it is necessary to allow foreign firms to operate in the economy to enhance efficiency of the economy. China has now the largest banking system in the world. The recent growth in non financial debt sector has raised concern for small term macroeconomic stability. The large stocks of intra-financial sector credit have continued to raise important risks for financial stability. IMF authorities have recognized that the growth in the size and complexity of the financial sector raises risks but also argued the problem was manageable.IMF authorities also continued to disagree with the “augmented” debt and deficit concepts used by staff. The authorities also disagreed with staff that the monetary stance was accommodative.

China has foreign currency reserves, at US$ 3 trillion, which is more than adequate to allow a continued gradual move to a floating exchange rate.

Some progress has been made in data frameworks, but still major data gaps remain, undermining policy making and credibility, IMF surveillance, and G20 commitments.IMF authorities also agreed with the need to broaden Chinese  publication of macroeconomic data.

 

Debt sustainability Analysis of China

 

In the narrow coverage scenario, general government debt is on a slightly increasing path. The projection reflects a gradual slowdown of real GDP growth to 5¾ percent y/y by 2022 General government debt under narrow coverage at 37 percent of GDP in end-2016 is increasing gradually. Debt has continued to rise rapidly and consolidation will be needed to prevent it from stabilizing at a very high level. Augmented debt will rise rapidly to about 92 percent of GDP in 2022. China faces relatively low risks to debt sustainability, but is vulnerable to contingent liability shocks. China’s debt profile will largely depend on the implementation of the new budget law and, more fundamentally, on the willingness to reduce public investment..

China’s housing and construction sectors will slow down in 2017. Industries which hold the major of China’s corporate debt, including commodities, building materials and other sectors related to construction, will be facing a major chunk of a sustained housing slump. Slow construction growth coupled with skyrocketed debt, along with sharp reductions in debt maturity periods, can easily cause corporate bankruptcies, testing Beijing’s institutional abilities to cope with them. U.S. protectionism and other international developments could put even more pressure on the Chinese economy, forcing Beijing to trade its economic reforms for greater spending to keep the economy sound.

China’s leaders will be on their guard as threats to the country’s social and economic stability mount.

Conclusion

There are reasons to believe that China can tolerate high levels of government debt-due to high savings, capital controls, strong state controls and confidence.IMF China representative along with the World Bank representative agreed on focus to reform in China. Reforms should be aiming at prevention of further buildup of risks which are stemming from rapid credit growth, intra-financial sect oral claims, and moving the economy to a more inclusive, environment-friendly, and sustainable growth path. This is also giving the markets a more decisive role, so eliminating distortions, and modernizing policy frameworks which will result in a more efficient use of resources, faster productivity growth, and rising living standards across the income spectrum.

 

 

Harsh Vardhan Pathak

 

 

 

Reference

 

http://www.imf.org/en/News/Articles/2017/08/09/NA081517-China-Economic-Outlook-in-Six-Charts

 

 

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