David Fuller's view -
Xi and Premier Li Keqiang are trying to defuse that debt bomb, rein in banks and local governments and promote the nation’s stock markets as a primary way for innovative and smaller companies to raise capital.
Both leaders say they’ve mapped out more than 300 reforms that over time will reduce state intervention in the economy. Among the initiatives is scaling back Energy-price controls that favor manufacturers. The changes are also designed to improve the social safety net and encourage market-driven deposit rates to get Chinese families saving less and spending more.
Few countries with the scale of China’s credit boom have escaped unscathed without experiencing some sort of banking crisis. Research by Michael Pettis, a finance professor at the Guanghua School of Management at Peking University, shows that “every investment-led growth miracle in the last 100 years has broken down.”
Avoiding that fate requires a high-wire balancing act for the government. It needs to wind down the torrent of investment -- 49 percent of China’s GDP from 2010 to 2014 -- without cratering the economy and worsening the situation for indebted local governments or the bad-debt burden of Chinese banks.
“Our goal is to keep China’s economic operation within the proper range,” Premier Li said in a March 31 interview with the Financial Times that was published Wednesday. Achieving the 7 percent target this year “won’t be easy” and requires “vision, perseverance and courage,” Li said, as cited by the newspaper.
Selling slower growth now for greater prosperity later isn’t an easy political sell, even in a one-party state. Xi faces entrenched interests that favor the status quo, such as state-owned nonfinancial enterprises that have $16 trillion in assets and local governments that have benefited from big public works projects and thriving real-estate markets.
There’s also the risk of a disorderly de-leveraging in the banking sector and the jobs-intensive property market. Any crisis there could take growth rates well below the government’s target of about 7 percent. China is already home to income-inequality levels on par with Nigeria and Mexico.
Throw higher unemployment into the mix and the risk of social unrest rises.
I have sometimes described China’s economy and stock market as interesting enigmas. For this reason I have also learned to be wary of highly opinionated forecasts for China from Western commentators.
However, I have developed some helpful guidelines for monitoring and China’s stock markets.
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