Na­tion should pro­mote idea of ‘cut­ting over­ca­pac­ity, de­stock­ing, delever­ag­ing and re­duc­ing cor­po­rate costs’

China Daily (Hong Kong) - - BUSINESS - By XIN ZHIMING xinzhim­ing@ chi­

China should pay more at­ten­tion to main­tain­ing a bal­ance be­tween cut­ting lever­age lev­els and sta­bi­liz­ing eco­nomic growth in the sec­ond half of this year after it achieved faster-than-ex­pected GDP growth of 6.9 per­cent in the first half, said a for­mer central bank ad­viser.

“So far, China has done a good job in strik­ing such a bal­ance,” said Yu Yongding, an economist at the In­sti­tute of World Eco­nom­ics and Pol­i­tics of the Chi­nese Academy of So­cial Sci­ences. “China’s delever­ag­ing move is in the right direction, but it is a long-term process and we should not carry it out too hastily so as to af­fect the nor­mal fi­nanc­ing ac­tiv­i­ties of en­ter­prises, es­pe­cially small and medium-sized com­pa­nies,” Yu, a for­mer mem­ber of mone­tary pol­icy com­mit­tee of the Peo­ple’s Bank of China, told China Daily.

China put for­ward the idea of “cut­ting over­ca­pac­ity, de­stock­ing, delever­ag­ing, re­duc­ing cor­po­rate costs and shoring up weak spots in the econ­omy” in late 2015 to push for­ward its sup­ply­side struc­tural re­form. In the lat­est de­vel­op­ment, Pres­i­dent Xi Jin­ping said at the Na­tional Fi­nan­cial Work Con­fer­ence, which ended on Satur­day, that the coun­try will fur­ther carry out “eco­nomic delever­ag­ing” to con­tain fi­nan­cial risks.

By the end of May, the debt to as­set ra­tio (the mea­sure of lever­age lev­els) of China’s ma­jor in­dus­trial en­ter­prises was 56.1 per­cent, down by 0.7 per­cent­age point from a year ago, ac­cord­ing to the Na­tional Bu­reau of Sta­tis­tics.

As China pushes delever­ag­ing, banks may re­duce loans to en­ter­prises, in­clud­ing small and medium-sized firms, which are the main contributor to China’s eco- nomic growth, jobs, taxes and ex­ports.

“The delever­ag­ing move should not af­fect the fi­nanc­ing of small and medi­um­sized en­ter­prises; with­out their brisk de­vel­op­ment, the vi­tal­ity of the econ­omy would suf­fer,” Yu said. “A vi­brant eco­nomic growth will in turn help re­solve the coun­try’s debt prob­lem.”

China’s GDP growth reached 6.9 per­cent in the sec­ond quar­ter of this year, and it may ease mod­er­ately in the sec­ond half, but there would not be any “hard land­ing”, he said. “Econ­o­mists gen­er­ally agree that the Chi­nese econ­omy has dropped to the lower band of the L-shaped tra­jec­tory; I think it is still pos­si­ble that growth may con­tinue to fluc­tu­ate and even fur­ther drop a lit­tle bit, but there would not be the danger of an eco­nomic hard land­ing.”

Such rel­a­tively solid growth prospects mean China can have more room to deal with its debt prob­lem, only that the tempo of delever­ag­ing should be prop­erly man­aged, Yu said.

In the short term, at least, the coun­try should be more tol­er­ant to­ward high-level lever­age lev­els, he said, cit­ing Ja­pan’s case.

In 1996, Ja­pan’s debt-toGDP ra­tio ex­ceeded 90 per­cent. Think­ing the ra­tio may be too high and could in­cur a fis­cal cri­sis, the pan­icked Ja­panese gov­ern­ment tight­ened its fis­cal poli­cies, which led to an eco­nomic re­ces­sion. Ja­pan later gave up its tight­en­ing fis­cal pol­icy stance and now al­though its debt-GDP ra­tio has ex­ceeded 250 per­cent, it is yet to en­counter a fis­cal cri­sis, Yu said.

The delever­ag­ing move should not af­fect the fi­nanc­ing of small and medium-sized en­ter­prises.” Yu Yongding, economist the debt to as­set ra­tio by the end of May

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