China’s economy continues to be a major source of uncertainty for global growth this year. Its 6.7 percent expansion in 2016 was within the range of Beijing’s target and may appear to be steadily on course to a slower but more stable growth. But the world’s second-largest economy is confronted with two key risks — the fall of its yuan currency and mounting private-sector debts, which if mishandled could trigger a serious crisis. Possible trade friction with the United States under new President Donald Trump, who views China as a key culprit for the loss of American manufacturing jobs, also clouds its prospects. Policymakers in Beijing need to take utmost care in steering the economy through its problems.
The annual growth in China’s gross domestic product was the slowest since 1990, when the economy grew a mere 3.9 percent under the weight of international sanctions imposed in the wake of the Tiananmen Square incident of 1989. President Xi Jinping, when he spoke earlier this month at the World Economic Forum meeting in Davos, Switzerland, tried to dispel concerns over the slowing growth by saying the Chinese economy is in a “new normal” driven by household spending. True, the GDP figure was within the government’s target of a 6.5 to 7 percent growth. The economy grew faster in the October-December period than in the previous quarter, and deflation concerns are receding, with consumer prices in December rising 2.1 percent from a year ago. Officials say the growth is within a reasonable range and that the economy’s structure is also improving, with the services sector accounting for an increasing portion of the total.
Still, the 2016 growth paints an unhealthy picture of the economy. Slowdown in private-sector investments dragged down the economy, but government stimulus such as public works spending and an overheated real estate market shored up its growth. Fixed asset investments grew 8.1 percent — compared with 10 percent growth in 2015 and the slowest in 17 years. Growth in private-sector investments sharply decelerated from 10.1 percent to 3.2 percent, which was partly offset by increased government spending.
Investments in real estate development, meanwhile, rose 6.9 percent — a sharp increase from the 1 percent rise the previous year. The government introduced tax cuts and monetary easing to shore up the economy, but corporate investments did not increase much due to fears over the future course of the economy. Money instead went to real estate investments, pushing up property prices. Authorities are aware that the growth relied heavily on property market bubbles, and are already starting to rein in the overheated market.
Cuts to the excess steel and coal output capacity — which has been deemed a major challenge for the economy for some time now — remain slow. But the difficulties involved in reducing the surplus industrial production may have been well anticipated. Rather, what’s drawing the concern as big sources of risk to the economy these days are the steep fall in the value of the renminbi and resulting capital outflow, as well as the mushrooming private-sector debts.
At the end of 2016, the yuan’s exchange rate against the dollar was down 6.6 percent from a year ago — the steepest annual fall since the currency regime shifted from a de facto fixed rate to the managed float system in 2005. The renminbi’s fall has prompted a capital outflow out of China, which in turn added further downward pressure on the currency. Trump has threatened to designate China a currency manipulator that devalues the yuan to make its exports more competitive in the U.S. market, but what’s happening is quite the opposite. Chinese authorities are believed to be repeating currency market interventions to sell the dollar and buy the yuan to stop the excessive fall in its own currency. China’s foreign currency reserves, into which the authorities tap to fund the market intervention, fell nearly $320 billion in a year to $3.1 trillion at the end of December, a sharp decline from the peak of nearly $4 trillion in mid-2014. A possible free fall of the yuan could create serious confusion in the world’s financial markets.
The rapid expansion in private-sector debt is another problem. According to the Bank of International Settlements, the outstanding private-sector debt in China hit 210 percent of GDP at the end of last March — closing in to the worst-ever level in Japan in 1995, when its debt reached 221 percent of GDP. A significant portion of that debt is believed to have turned into nonperforming loans of financial institutions, which the Japan Research Institute estimates amount to some ¥190 trillion. A possible burst of the real estate market bubble at this juncture could throw the Chinese economy into turmoil to the tune of Japan’s plight following the collapse of its own bubble boom in the early 1990s.
Japan, whose economy would be severely affected by such troubles in China, should be on guard against these sets of risks.
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