Market fluctuations normal part of China’s transition
Editor’s Note:
Sagging mainland stocks, along with a bond correction and yuan weakness have led to concerns over the health of China’s financial market amid lingering trade rows with the US. In an exclusive interview with the Global Times (GT) on Monday, Li Yang (Li), director-general of the National Institution for Finance and Development (NIFD) with the Chinese Academy of Social Sciences, discussed the nation’s financial conditions and possible ways to cope with the problems facing the world’s second-largest economy. GT: There have recently been some fluctuations in the domestic stock, bond and foreign exchange markets, drawing attention from both the regulatory authorities and normal people. How should such fluctuations be viewed? Li: China’s current market developments need to be seen as part of a long-term process. Otherwise, we can’t see the forest for the trees.
Since 2008, the biggest change in China’s economic development has been a shift from high-speed growth toward medium-to-high-speed growth, or a transition toward a new normal. After the 19th Party Congress, the shift was summarized as the nation’s transition toward a stage of high-quality development. Our observations of all problems, especially financial issues, must be based on this big picture.
A number of problems that have piled up in China’s financial system amid the rapid economic growth of the last 30 years are now being laid bare. While fast economic expansion comes with an even quicker financial expansion, a slowdown in economic growth tends to be accompanied by a more conspicuous contraction in the financial sector. This suggests that we should not only be resolute about squeezing bubbles, but should also be highly vigilant toward the problems that can come.
Still, I want to point out that the current problems have been anticipated by the government. A series of risk management measures have been taken over the last few years and some of the measures have yielded initial results. The market situations have largely been within expectations. Therefore, so long as there are no market abnormalities, we should be able to respond in a swift and timely manner. GT: Will China experience financial panic? If this happens, how could China cope with it? Li: A typical example of financial panic is like what happened in 2008 following the collapse of Lehman Brothers. Right now, the problem with Chinese financial markets is not that serious. But if there are signs of such panic, China should respond quickly.
The problems are partly a result of the ongoing financial reforms. For example, since the beginning of the year, China has seen a surge in bond defaults, which not only involve State-owned enterprises but also private firms, listed firms and local government debts.
But this trend should not be changed. Market players should allow their credit and risks to be visible to the market and let investors decide. Only in this way can China’s bond market grow healthily. So we should not make a fuss over the problems seen in the bond market.
Of course, there will be some pain in this process, so we need to create a good environment with a sound legal framework and the right macroeconomic conditions. Policymakers need to communicate adequately with the market and continue with the reforms. Over the past few weeks, the central bank has taken a series of measures such as targeted cuts in the reserve requirement ratio and massive reverse repos to release liquidity.
The problems in China’s financial system are far from being as grave as during the financial crisis in 2008. As long as Chinese policymakers can communicate well with the market, no financial panic will occur. GT: What is the best way to balance the intensity and the pace of deleveraging in China? Li: In the past few years, especially in the real estate sector and stock market, excessive use of leverage has become a prominent problem, so we need to deleverage. The problem is that the economy is made up of different departments, and the ability of each department to deleverage is different, so it can’t be the same across the board. That’s where arrangements for structural de-leveraging come in.
We need to avoid excessive government debt and be cautious about high debt levels at companies. Our research shows that the overall debt and leverage ratio in the Chinese economy is relatively low compared to other major economies, but there is relatively high leverage among Chinese companies, which is a significant problem.
Therefore, in terms of structural de-leveraging, our top priority is companies and the key is to focus on State-owned enterprises (SOEs). The core issue for deleveraging at SOEs is to deal with zombie firms, which are essentially nonperforming assets.
Another problem is related to the government, especially local governments. Addressing this problem is very complicated because it involves the relationship between the government and the market. So to fully address the debt issue for local governments, we need to deepen our systematic reform. GT: Recently, China-US trade friction has become the main external risk factor to worry the market. How do you view the problems in China-US trade? Li: The trade friction has been more noticeable this year, but it comes with history. China has long been viewed as heterodox by Western countries and was put on the embargo list for high-tech and military products after World War II.
The US has also been complaining about its trade deficit for a long time. In fact, the deficit could easily be mitigated if the US were to alter its trade policy and allow China to purchase US hightech products. Instead, the US has been pointing fingers at China. The reasons for this are complicated and beyond the realm of economics.
What is happening right now is a continuation of history, and it is based partly on adjustments in the global governance mechanism. China believes the world can achieve multilateral win-win progress. The Belt and Road initiative is based on this belief. It connects emerging markets and developing countries that have been neglected by the globalization path led by developed countries such as the US. So it is a new development path and governance model, and the trade friction has come because this is seen as a challenge to the old version. GT: China’s equity market has opened up further to foreign capital this year. Some are worried about the risks in this process. What do you think of it? Li: I believe the opening-up process will be faster than ever. We focus too much on issues like whether foreign capital will take control. In an open world, if an economic entity malfunctions, the foreign capital within it can be like an anchor. SOEs have millions of ways to avoid risks and save themselves. But foreign capital counts on economic stability to thrive and develop.
It is time to abandon the concerns about foreign capital. Opening the equity market is nothing more than giving foreign capital access to yuandenominated financial assets. Whether the opening-up is a risk or a benefit depends on the development stage of the market mechanism.
We should fine-tune the market, stabilize the policies, and improve the legal framework. This will allow foreign capital to benefit the Chinese economy to the greatest degree.