The world has an inaccurate picture of the Chinese economy. Wall Street in particular views the Chinese economy as one of the most risky zones in the current global economy as its credit and debt account for 200 percent of GDP, rising from 100 percent. As a result, many argue that the Chinese economy must undergo a period of deleveraging which will cause economic and social instability and a slowing down of the growth rate. I, however, do not hold with these views. There are three reasons:
Firstly, the world's developed countries reacted to the financial crisis by increasing government debt and bloating the balance sheets of central banks. As a result those countries increased rather than reduced their debt levels when taking into account central bank debt as well as government and private debt. China's economy has just followed the same trend. In current situation any economy going against this global trend will meet more problems.
Secondly, China's points of economic growth currently lie in quasi public products such as urban development projects, clean air regulation, water treatment and hydraulic works. The benefit of quasi products is that investment in them can be directed from the private sector through innovation and funding and, as a result, China's economy could potentially maintain a reasonable economic growth rate for some time to come.
Thirdly, China's financial sector does present some problems for the economy in that State-owned banks have been making more loans, some of which are stagnant debts and bad debts. Such debts will be addressed by a series of reform programs, and local governments should implement reorganization in order to guarantee reliable and sustainable sources of tax revenue.
Meanwhile, China should relax controls on the private sector and this could be achieved in part by opening the quasi public products sector to private investors.
I believe that as of July, the central government will organize a serious of discussions, workshops and seminars to work out reforming measures and economic polices.
The author is director of the Center for China in the World Economy (CCWE) at Tsinghua University.
This post is the English version of the keynote speech delivered at the Third Global Think Tank Summit held in Beijing on June 28-29 and was translated by Wang Yanfang.
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