One of the Chinese government’s senior-most economists says that financial risk must be accommodated in order to maintain stable, long-term growth, and called for ailing enterprises to be allowed to fail.
Addressing the “New Economy, New Administration” forum recently held by the Shanghai Institute of Finance and Law (上海金融与法律研究院), Xia Bin, director-general of the State Council’s Financial Research Institute, said that allowing a certain amount of latitude for financial risk is the pre-condition for stable and sustainable growth in China.
“If financial risk cannot be promptly and gradually released, we will eventually see an explosion of systemic risk,” said Xia.
“If we do not let enterprises that should go bankrupt to go bankrupt, they will continue to take up social resources, their balance sheets will not be able to shrink…it will not be possible to rationally allocate social resources.
“This means that we only need to allow for a little risk, in order to be able to stabilise the economy, and enable the economy to continue to grow.”
In his broader analysis of the Chinese economy, Xia pointed out at while China’s GDP growth is easing, consumer demand is gradually increasing.
China’s GDP growth fell from 14.2% in 2007 to 6.9% in the third quarter of 2017, while the final contribution rate of consumption to GDP has risen to 64.6% in 2016 from 48% in 2003.
“On the one hand, GDP growth is sliding and investment growth is sliding, so consumption has risen in comparison. On the other hand consumption growth is greater than GDP growth, and China has already becoming the worlds’ second-largest consuming nation.”
Xia further points out that the M2 money supply continues to expand, and that overall leverage levels remain high.
According to Chinese central bank data as of the end of September, the broad M2 money supply balance was 165.57 trillion yuan, for year-on-year growth of 9.2%
Data from the National Institution of Finance and Development indicates that as of the end of 2015 China’s total social financial leverage ratio was 249%, while the most recent data from the Bank of International Settlements points to a total leverage rate of 255.6% as of the end of the third quarter of 2016.
Xia said that the entry of a large volume of liquidity into the market and easing GDP growth in tandem with rising social leverage ratio shows that investment efficiency is on the decline, and that the productivity ratio of new capital has fallen.
Xia blames this predicament on failure to effectively implement much-needed systemic and supply-side reforms that will serve to spur adjustments to China’s economic structure, as it transitions from high-speed to high-quality growth.
“In the face of a large volume of liquidity and debt…reforms and structural adjustments remain slow, so market logic dictates that current economic growth slides.”