Why China's growth target had to be cut
- By Dan Steinbock
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E-mail China.org.cn, March 9, 2015
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[]By Jiao Haiyang/China.org.cn] |
Local debt burden
The debt problem is serious and will penalize growth. However, it is manageable as long as the underlying fiscal issues will be addressed and reforms are accelerated.
China's level of debt has grown rapidly ever since the huge stimulus package of 2009. However, Chinese cities do not exhibit evidence of colossal, widespread distress. Instead, as corporate debt has soared, risks have accumulated in certain sectors with excess capacity (e.g. steel) and large state-owned enterprises (SOEs).
Unlike in the United States, Europe or Japan, China's challenge is not (national) public debt, which is estimated to be around 23 percent of the GDP; in relative terms, 50 percent less than in the United States; and 200 percent less than in Japan.
Altogether, credit losses stemming for the current economic stresses are not likely to exceed 20 percent of the GDP.
For now, the central government has resources to support major banks and SOEs, and limit potential damage from rising financial stress in the corporate sector.
Bumps at home, headwinds abroad
During the ongoing year, China's GDP growth rate is likely to decrease from 7 percent to 6.5 percent on a quarterly basis. On an annual basis, that would translate to 6.7-6.9 percent – relatively close to the new target of "about 7 percent."
This outcome, however, does require more support from policymakers, even new rate cuts. Most importantly, it requires accelerated reforms in the coming months.
Concerns about muted growth are exaggerated, however. After three decades of growth fueled by investment and net exports, Chinese producers suffer from overcapacity, hence the negative manufacturing data.
On the other hand, Chinese consumption demand and consumer confidence remain solid and fueled by strong wage growth in the non-manufacturing sectors. And with its targeted measures, the People's Bank of China is likely to ensure a healthy level of consumption.
In the final analysis, China can effectively address the downside risks at home, but its capabilities to address those risks abroad are inherently limited. That's the challenge when the unsustainable debt-led growth will eventually eclipse in the major advanced economies.
Dr. Dan Steinbock is research director of International Business at India China and America Institute (USA) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
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