Beijing’s growth ammunition
China monetary policy ‘prudently accommodative’
by Zhongxia Jin in Delhi
Mon 14 Mar 2016
From a historical perspective, Asia is in a long process of awakening – and will continue to be the world’s fastest-growing region. The four largest Asian economies, Japan, Korea, China and India, sharing important elements of cultural heritage, are good examples.
India is speeding up with great potential. Japan is growing slowly, but in view of its shrinking population its performance is quite stable in per capita and quality terms. Korea is playing an important role in Asia-Pacific economic integration. China is rebalancing and consolidating, and has become part of the driving force of the world economy.
Against that background, China has made progress in improving its economic structure. Services account for 51% of GDP, with consumption taking a rising share. Underlining better economic balance, the current account surplus dropped to 2.7% of GDP last year from 10% in 2007. Outstanding foreign currency-denominated debt has declined to around one quarter of official foreign reserves.
China has plenty of growth ammunition. Monetary policy looks prudently accommodative and has far from exhausted its manoeuvering room. Fiscal policy will be more countercyclical and expansionary. China is further increasing its budget deficit to 3% of GDP this year. Business taxes will soon be replaced by a new VAT, allowing annual tax cuts of Rmb450bn ($69bn). There are plans to increase infrastructure investment, including a massive rural power grid upgrade, with total investment of Rmb700bn.
The major risks for the Chinese economy are a relatively high corporate leverage ratio and excess capacity in some manufacturing industries.
The corporate debt to GDP ratio is 95-115%, lower than some estimates, partly because of double-counting local government financing vehicles, which should be categorised as public sector leverage. The debt ratios of the public sector and of households remain moderate, at 60% and 39% of GDP respectively.
The Chinese government is taking measures to reduce excess capacity in steel and coal-mining, in steel by 100-150m tonnes in five years, and in coal by 500m tonnes in three to five years. The central government has earmarked $15bn to relocate unemployed people in the steel and coal sectors.
Although the corporate sector has been highly reliant on debt financing, its equity financing is very low. Therefore, some commercial banks will be encouraged to carry out debt for equity swaps to improve corporate financing.
The authorities are taking steps to absorb excess housing inventory. China is taking advantage of its still-low urbanisation ratio of around 55%. It is relaxing restrictions to help rural migrants purchase housing in urban areas, with cuts in minimum down-payments, mortgage interest rates and property transaction tax.
China is deleveraging local government financing by swapping existing high-cost, short-term commercial borrowing for low-cost, longer-term local government bonds. Last year, Rmb3.18tn in local government bonds was issued to carry out these swaps, with average interest rates falling to 3.5% from 10%.
There have been concerns that, as excess capacity is cut, non-performing loans may rise significantly, albeit from a very low base. However, in my view, NPL prospects are much more manageable than in the early 2000s, when the NPL ratio was above 40%, and capital adequacy ratios were low and even negative. China’s major commercial banks are now much more resilient, with a capital adequacy ratio of around 12%, and high provision coverage ratios.
Even if, in extreme cases, banks’ capital base was completely eroded, this would require a public capital injection of a maximum of 10% of GDP. That would raise the public debt to GDP ratio to 70% from 60%, below the levels in most European countries.
Zhongxia Jin is Executive Director for China at the International Monetary Fund. This article is based on a 12 March speech in Delhi.
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