© Yang Zhao
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Recently, the IMF in its so called Article 4 report has issued a warning on the rising China's debt burden. How do you asses the current Chinese debt level? Do you think the IMF overstates the risk?
It is difficult to measure; however, overall, the debt to GDP ratio in China is now above 200%. One can base their measurement using different statistic data, but, in general, it is above 200%, and a lot of it lies on the corporate sector. This situation creates certain problems, causing the higher financial cost for the corporate sector, which will put stress on the economic growth, particularly on profitability of the corporate sector. Thus, it will require figuring out how to deal with the corporate debt. One possible scenario is that the government might show more leverage. In this way, the part of the corporate debt might shift to the government, as we know that more than 30% of the corporate debt belongs to state owned enterprises. Essentially, a great share of such debt belongs to the local government's financial vehicles, which should be viewed as a part of the local government; therefore, I think that a significant part of the debt will be shifted to the government sector. Moreover, I do not agree with the statement that China is entering a financial crisis, because if you look at the government sector, the debt to GDP ratio is still very low; thus, the government can show much more responsibility in dealing with that.
How do you assess China's progress in rebalancing its economy from heavy industry towards consumption and services?
To my mind, that is happening in two different ways. The first is based on fundamental factors such as the demographic change, urbanisation, and reforms related to urbanisation. All the fundamental changes drive up the consumption share in GDP, so the rebalancing is still happening.
On the other hand, the investment growth slowed down further; it is rather driven by weakening investment demand. China needs to keep the balance between maintaining its growth and its restructuring. As a result of the restructuring, growth will slow down, as investment is slowing down. It seems that consumption cannot replace investment as the growth engine. Consumption is a function of income or GDP growth: if investment growth slows down so will the GDP growth as well as consumption, but at a slower pace, certainly. That is why, as a share of the total income or GDP, consumption is picking up. Nevertheless, that does not necessarily mean that consumption can take place of investment as the growth engine. Usually, during the restructuring we see pretty significant slowdown of economic growth, which challenges the government policy. Thus, the government definitely needs to keep the balance between growth and restructuring. To my mind, that requires the government to stimulate the economy from time to time, but it is quite a delicate issue, as the government definitely needs to avoid over-stimulus by worsening the economic structure with overcapacity or ineffective investment.