China and global economic risks

Author: Editorial Board, East Asia Forum

On the surface of it, the global economic recovery looks stronger day by day. The International Monetary Fund has upped its forecasts and the underlying real growth trend in major industrialised country markets seems at last to validate the continuing exuberance of stock markets around the world.

The Financial Times Stock Exchange All-World Index rose by nearly 22 per cent in 2017  — its best performance since the post-crisis rebound in 2009. In the United States the prediction of 2.3 per cent growth this year last October now looks conservative.

China’s growth last year appears to have nudged the magic 7 per cent. While that is well below the growth rate China notched up last decade, the scale of it means that China’s contribution to global output in absolute terms is bigger today than it was when the Chinese economy was clipping along at a heady 10 per cent per annum plus.

Many reckoned that China was headed for a sharp slowdown coming at the end of its political cycle last year. So far that risk has been kept at bay.

Ideas of secular stagnation in industrial economies have begun to fade. While productivity growth still appears on the wane, the global mood has turned bullish across the developed and emerging worlds.

As monetary policy and global capital markets begin to tighten, the caution in the global economy is now sharply focussed on debt levels. Nominal interest rates are set to climb from their historic lows. That will make high debt levels more problematic, which will potentially check growth by triggering disorderly deleveraging. Inflation slack may ease the capital market transition globally, but in China, effecting financial market reform while managing substantial corporate debt deleveraging presents another order of systemic risk.

China now accounts for a smidgen under 15 per cent of global output but its contribution to global growth is twice that share. Yet, as the IMF has lifted its forecasts for Chinese growth, global sentiment on Chinese debt risk has grown more pessimistic because of fears about Chinese corporate debt and adverse economic shocks.

Maintaining financial stability is a top policy in China today, as People’s Bank of China (PBoC) Governor Zhou Xiaochuan has recently made clear.

What are the prospects of getting it right?

In this week’s lead essay, Yu Yongding points out that China’s corporate debt-to-GDP ratio is actually falling. ‘The leverage ratio of China’s non-financial corporations fell by 0.5 percentage points in the third quarter of 2016 and has continued falling since. In the first quarter of 2017, the debt-to-GDP ratio of China’s ‘above scale’ industrial corporations fell by 0.7 percentage points year-on-year. After the dramatic correction in 2015, China’s equity market is basically stable. The price/earnings ratio and the price/book value ratio fell from 54 to 19 and 8.5 to 2.3 respectively. Further large falls in share prices in China are unlikely’. Read more…

 

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