MNI INTERVIEW: China Must Invest For Long Term Growth - Huang

China should prioritise investment in infrastructure and next generation industries to drive the structural reform needed to deliver long-term growth and productivity gains at a time when the property market is dragging on growth, former People’s Bank of China adviser Huang Yiping told MNI.

“The bigger problem we are facing now is the need for structural reform compared with short-term cyclical difficulties, as China is entering into a new development phase during which improved productivity and shift in economic drivers are crucial for long-term growth,” said Huang, who is deputy dean of the National School of Development at Peking University. (See MNI INTERVIEW: PBOC Should Avoid Excessive Easing - Huang)

Although the property market is stabilising after a sharp correction over the past two years, the sector is unlikely to contribute 20%-30% of GDP growth per year that it has in the past. Investment with a long-term focus is one way of partly plugging the growth gap via cultivating new growth drivers.

“In the past, the expansion of households balance sheet largely depended on increasing investment in houses, but it is unsustainable,” he said. “If the creation of new engines of growth lags behind the withdrawal of policy support for the property sector, it would be an extremely risky scenario,” he warned. (See MNI: China's Rebound At Risk From Balance Sheet Recession)

INVESTING IN THE FUTURE

Huang identified investments in the green transition, technology upgrades for traditional industries, high-tech manufacturing, clean energy, and the digital economy as sectors that would underwrite growth and productivity gains. He said urbanisation would also continue to contribute to growth.

Recharging China’s growth trajectory by focusing on future-facing industries and technologies would allay concerns about debt-funded long-term investment.

“If rising debt could boost new growth drivers, the debt/GDP ratio would still be steady because the denominator would be boosted. Without proper economic growth, risks would be even bigger,” he said.

“It is a hurtful adjustment, but we have to do that,” he said, underlining the challenges of structural reform and transition to new drivers of growth.

In the short term, regulators should closely monitor possible financial risks from local government funding vehicles and the threat of bad loans among some small banks that increased credit support to SMEs in past years, Huang said.