SIFL CONFERENCE. Opportunities for China s Economy when. stepping into the 'new-normal' stage. Exploring Effective Solutions for a Changing World

Size: px

Start display at page:

Download "SIFL CONFERENCE. Opportunities for China s Economy when. stepping into the 'new-normal' stage. Exploring Effective Solutions for a Changing World"

Herbert Stanley
5 years ago
Views:

NO.105 SIFL CONFERENCE Opportunities for China s Economy when stepping into the 'new-normal' stage Exploring Effective Solutions for a Changing World W ITH stabilizing economic growth, China s

How to see the selection of economic reform policies? SHANGHAI 1902, Building 1, No. 1199 Minsheng Road, Pudong, Shanghai, China,200135 Email: office@sifl.org.

Hongru Financial Education Foundation, SIFL Institute and Reinventing Bretton Woods Committee.

1 NO.105 SIFL CONFERENCE Opportunities for China s Economy when stepping into the 'new-normal' stage Exploring Effective Solutions for a Changing World W ITH stabilizing economic growth, China s economy has stepped into the 'new-normal' stage. Under the new macro conditions, can rapid growth be achieved for the next decade? What kind of economic growth is appropriate? How to see the selection of economic reform policies? SHANGHAI 1902, Building 1, No Minsheng Road, Pudong, Shanghai, China, office@sifl.org.cn On October 31, experts and scholars held a round table discussion in respect to the above-stated issues at 2014 Annual Conference: China s economic prospects in new normal co-sponsored by LIU Hongru Financial Education Foundation, SIFL Institute and Reinventing Bretton Woods Committee. The guests all expected that there would be an above 7% economic growth for China by the year of 2015, and interest cut and reserve ratio reduction are imperative in confrontation with pressure of currently further downward economy. This round table discussion was presided over by Yang Yanqing, the Deputy Editor-in-Chief of China Business News. And experts had engaged in the discussion including Gene Frieda, Partner and senior global strategist at Moore Capital, Li Xunlei, Vice 1

President and Chief Economist of Haitong Securities, Wang Qing, President of Shanghai Chongyang Investment, Wei Sen, Director of Institute of Economic Thoughts and Economic History at Fudan

2 President and Chief Economist of Haitong Securities, Wang Qing, President of Shanghai Chongyang Investment, Wei Sen, Director of Institute of Economic Thoughts and Economic History at Fudan University and Shao Yu, Chief Economist of Orient Securities. Growth Under the new normal As a whole, it is difficult to change the downward trend of China s economy, but it is ok to have adjustment. Li Xunlei believed that the main restriction on economic growth was decrease in supply, including ageing, slowdown in investment growth, etc. He pointed that there would be a new round of financial crisis and adjustment in China prior to Comparatively speaking, the situation after the adjustment is relatively optimistic. It is believed that China is likely to cross over the trap of financial crisis. If there was still growth from 2020 to 2030, it might be about 4%. In globalization mode, it is no longer a sustainable way to promote economic growth by trade and competition among local governments within past China, and China will be plunged into a low economic growth situation for some time or longer in the future. Shao Yu believed that, currently, there lacked enough impetus for reform, and it would be the next challenge of China as to how to truly step out of breakage of globalization, breakage of growth and breakage of reform. There might appear a low tide in next one or two years, but it might be able to achieve about 7% economic growth in next 8-10 years if we can release the bonus of household registration reform, state-owned enterprise 2

3 reform and land reform, in addition to reform of the supply end. However, in Wang Qing s opinion, the key was to avoid being caught in middle-income trap during the growth, and some short-term policies might be able to prevent systemic crisis in economy. He pointed out China lacked efficient measures in appreciation of RMB exchange rate in 2005 exchange rate reform, which had caused emergence of later stock market bubble and today s property-value bubble; what was required by financial innovation under the new normal stage is the market-oriented pricing of financial products, while the rising interest rate brought about by shadow banking system reflecting distorted financial innovation; in addition, the next several years might witness relatively tight monetary condition, which should be paid with enough concern. Gene Frieda expressed that the successful high growth mode in past 30 years might be restricting factors on economic growth in confrontation with rising cost presently like land, labor cost, etc., and China s growth mode was undergoing a change while there might be higher risk in structural reform. China is not to or unable to deviate from international rule, and is approaching international average growth value gradually, which is about 2%~3%. However, Wei Sen believed that there would not appear Minsky Moment (Minsky Moment, i.e. collapse moment of asset value) within a short term in China, but it was still worrying as to the whole status quo with high debt. The most important indicator is enterprise debt which accounts for 3.5 times of the enterprises profit currently. With imminent repayment climax, the days might be extremely difficult for enterprises, and this might be a normality of groups of enterprise going to collapse, which will constitute the other side of a coin with downward Chinese economic growth. Interest Cut and Reserve Ratio Reduction Are Imperative Just as what Wei Sen has said, China has accumulated a large quantity of debts since the financial crisis of 2009, and it is an important issue to take precautions against possible debt crisis in China. As a whole, there wouldn t emerge systemic risk under loose monetary condition currently, however, the leverage of enterprise is relatively high with sharply worsening debts from enterprise and financial department. Li Xunlei suggested the current reform should shift the leverage instead of simply increasing it i.e., the government leverage could increase with its rising transparency, while the enterprises leverage ratio should be decreased; the bank leverage in financial sector needed to be decreased for development of direct financing; meanwhile, he also suggested to solve the current economic problems by fiscal measures. Shao Yu also expressed his consent on concept of leverage transferring, from local to central government, from fiscal to monetary, from 3

4 government to residents, from bank to capital market and from domestic to overseas. Frieda noted local debt platform was to be depended on for debt restructuring through issuing bonds, and this was a very good method for debt restructuring. He also emphasized structural problem led by liquidities, which was more threatening than insolvency. China s engine for economic growth is very weak, while the monetary and financial condition is still very strict currently. Wang Qing expressed that the aim of monetary policy, obviously, was not only to solve short-term economic fluctuation, but also to solve a series of problems implied in past decade of expanding asset price, including high leverage and excessive capacity. However, seeing from the price data published recently, PPI had suffered 32 months of consecutive negative growth, and there had been a 1.6% growth in CPI of September year to year, therefore almost all the experts suggested cutting interest and reserve ratio as soon as possible. Now it is a very critic moment with declining GDP and overwhelming pressure down upon enterprises, so we should loosen the monetary policy even though it might be ineffective; meanwhile, government should implement tax reduction instead of structural tax reduction right now. Said Wei Sen. 4

5 China s financial risks O n October 23, 2014, Dr Zhu Haibin, chief economist for China of J.P. Morgan, addressed a speech at the 19th Hongru Forum of 2014, sharing his opinions about risks and its explosion mechanism of China s financial system with guests and putting forward three suggestions based on the trend of the macro economy. According to the two indicators measuring the risks of financial system--credit/gdp and credit/gdp gap, Dr Zhu Haibin pointed out that China s financial risks are getting bigger. Generally speaking, the chances that financial crisis appears would be very high, if the annual growth of credit/gdp exceeded 5%, or the growth of credit/gdp was over 30% within five years. The figure has increased 80% in China from 2009 to Nevertheless, such an indicator applied to the developed countries with steady economic development, but it did not apply to the developing countries experiencing fast-growing economy. However, the second indicator of credit/gdp gap offered a good resolution to this issue. It referred to the long-term deviation degree, when which exceeded 10%, the risks entered the warning zone. And, China has been almost in the warning zone from 2010 to What were the main causes of the risks in China s financial system? In general, the main causes included real estate, shadow banking system and local government debts. While, according to Dr. Zhu, the most important risk point of the financial system was the enterprise debt. Because enterprise debt involved both real estate and industries with excess capacity; both state-owned enterprises 5

6 and private businesses; and both bank loans and shadow banks. Why the real estate was not one of the points causing the financial risks? According to him, the risks in the real estate were mainly linked with the macro-economy not the finance. Macro risk referred to the impact of adjusted economy on the decline in the real estate investment, for which accounted for 25% of the fixed investments and contributed 20% of GDP and 1% GDP growth respectively. Meanwhile, considering the lower financial risk, it was impossible to collapse. He believed that, even though oversupply caused the adjustment of the housing price, yet the turning point for demand did not appear. So it would take two years for developers to a new picture through adjusting the production and inventory. Also, the real estate had a small financial risk exposure. The mortgage loan made up for 12-13% of the commercial bank loans, and at the same time, household balance sheet showed healthy signs. Developer s loans accounted for about 6-7% of the total commercial bank loans. Even though in recent years developers have made more financing estimated at RMB 4 trillion through the shadow banks, but the commercial bank loan was the lion s share in the stock. Therefore, the possibility of the financial risks facing real estate was not high, from the perspective of the overall financial risk exposure. The key to dissolving enterprise debt was to allow enterprises to deleverage, but such a move would face great difficulty. According to him, the three difficulties were as follows. The first is the significant economic downturn. Corporate profits, government revenue and nominal GDP were closely interconnected. Second, the real interest rate has arrived to 7-8% in China. The third is the declining investment efficiency of Chinese enterprises. China s TFP dropped to 1% from 3.5% in 2008, while the investment/yield ratio increased to 6 from 2.5 in Accordingly, Dr. Zhu put forward three policy suggestions in the aspect of corporate liabilities level, profitability and real interest rate. First, due to the great difficulty in directly lowering the corporate liabilities level, it was necessary to maintain a certain macroeconomic growth. Second, it was necessary to reduce enterprise taxes, thus promoting the upgrade of manufacture industry. Third, in order to reduce effective real estate, it was necessary to relax restrictions on the private banks, to build the multilayer financing system, to correct the distorted financing through financial reforms and state-owned enterprise reform and the central bank would appropriately increase the inflation target. Commentary guests were Gao Limin, researcher at SIFL Institute, Liu Haiying, chief economist at Shanghai Capitalledge Investment Management Co., Ltd., Wang Yongxin, professor of Cces of Fudan University, and Zheng Yong, vice president of Pudong Branch of Shanghai, China Construction Bank. 6

Rapporteur: Haiyi Liu

Rapporteur: Haiyi Liu "Can China Sustain its Growth? China's Economic Challenges in the Next Ten Years" Monday, January 7, 2013 Event Summary Event Sponsored by Fudan- UC Center on Contemporary China Co- hosted by the 21st