Chinese banks have world’s lowest rate of bad loans
- By Ni Tao
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E-mail Shanghai Daily, May 20, 2014
Q: The Shanghai Pilot Free Trade Zone is facing stiff competition from other localities, for instance, Guangdong, which is contemplating its own FTZ. Does that mean Shanghai has to accelerate FTZ reform?
A: Competition is good. Now you have the Shanghai zone, and soon Guangdong and Tianjin may be added to the list. Ideally, the whole Shanghai is a free trade area.
The problem is, the government policy-makers don’t know how big the impact is. And Chinese like to do experiments, in part to see how things will play out, in part to gauge resistance from interest groups. Their interests are being challenged, and there will be income redistribution.
Once you have this paradigm shift, you always have wealth redistribution between different interest groups. So of course there is a lot of resistance. My strong view is that the negative list is probably a result of the need to satisfy some interest groups.
Certainly pressure is on Shanghai municipal government to step up, otherwise the Guangdong project, near Macau, will overtake it. Of course, there is a practicality problem, but the mentality is that you need to be bolder, to make a bigger step.
Q: Is it possible for local governments to issue municipal bonds to relieve their debt burden?
A: That is a huge opportunity for the debt market, the fixed income market. The US financial market is two thirds of debt, one third of equity.
China is the opposite. This is not right, I think. It probably made sense in the past, because in the period of rapid growth, equity is more important. If you look at the startups, for example, most of them are equity-financed. Very few are debt-financed.
But when the economy matures to a certain extent, the fixed income becomes dominant.
China has been growing over the last 30 years. Its economy has reached the point where 10 percent growth is no longer sustainable.
We have to be satisfied with 7 percent. So it means that China is probably relatively mature.
I don’t know if we can use the age metaphor. A decade ago China was like 17 or 18 years old. Now it is 30 or 40, mid-age. The US is 40 or 50. When you get older, you want stability. So fixed income is a natural option.
By 2030, China’s population of old people over 60 years old will be 300 million, which will be more than the entire population of the US.
And old people don’t like stocks, they like stability. They would prefer fixed income, and so I think the trend in China is moving toward the US model. Eventually the proportion of the equity market will come down, and the debt market will go up.
A debt market without municipal bonds is not efficient.
In China, in the future, the bond market needs to be deeper and thicker. In the next 20 or 30 years, I think this is the trend that has to go. The municipal bond market needs to be developed.
That can solve some of the problems of municipal development, which is now too reliant on property finance.
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