MNI INTERVIEW: China To Address Debt Risks Over Longer Term

China’s pivot back to more growth-friendly expansionary policies after last year’s moves to tighten controls over the property market and big tech platforms may prove unsustainable in the longer term due to growing debts and monetary tightening by the Federal Reserve, a prominent policy advisor told MNI in an interview.

For now, the most urgent task for policymakers is to counter what could be a serious slowdown, said Huang Yiping, a former People's Bank of China’s Monetary Policy Committee member, speaking after Vice Premier Liu He on Wednesday sparked an equity rally by saying the government would take measures to boost the economy in the first quarter and implement market-friendly policies.

But persistent challenges including high leverage, financial risks and bubbly property prices will have to be dealt with eventually via appropriate cross-cyclical adjustments, said Huang, now deputy dean of the National School of Development at Peking University, using a phrase employed by officials to refer to smaller policy moves taken over a longer period of time in order to tackle economic imbalances.

Liu’s statement showed that policymakers have realised some measures enacted in order to defuse potential risks have damaged investor confidence and contributed to last year’s surprisingly rapid economic slowdown, Huang said.

PROPERTY CONTROLS EASED

However, authorities still face a dilemma with regards to property, a sector where leverage is high, but which is now once again seen as an important driver of economic growth in a year when exports are softening, he said.

Signalling a reversal of recent moves to crack down on excessive property borrowing, which had triggered a sharp slowdown in activity, dragging down credit growth and the economy as a whole, Liu said officials will enact “timely” forms of risk prevention while providing support to the industry.

Some cities have already acted to ease real estate conditions, facilitating loans to house-buyers and developers, and lowering mortgage down-payment ratios and interest rates, Huang noted. Plans to levy property tax in more cities , which Huang described as a positive long-term bubble-prevention measure, have also been pushed back.

But the government has reaffirmed its commitment to the principle that houses are for living in rather than for speculation, which Huang said should mean rapid growth seen in the past will not be repeated.

Property and related sectors contributed about 20% of GDP from 2016 to 2020, according to Huatai Securities.

A new Financial Stability Fund, first mentioned by Premier Li Keqiang during the National People’s Congress, should also contain risks from local government funding vehicles, smaller banks and firms in industries not favoured under long-term economic plans when these run into trouble, Huang said.

While the state-run fund would not initially be very large, it could be increased in size if necessary and would recapitalise or provide liquidity to troubled entities, he said.

PBOC EASING

The People’s Bank of China will maintain an easing bias, though its policy space is likely to be constrained by a hawkish Fed, Huang said. An earlier Fed tightening cycle from 2015-2016 prompted capital outflows and yuan weakening, and while conditions have changed a repeat of similar pressures could reduce the room for further Chinese rate cuts, he said.

But China has significant strengths enabling it to withstand significant global financial market volatility, including a robust fiscal position, a large trade surplus and foreign reserves, as well as the shield provided by an incompletely convertible capital account, he noted.

Other headwinds could result from a stagflationary impulse to the global economy following Russia’s invasion of Ukraine, Huang said. There is also a danger that sanctions imposed on Russia could be extended to China, he said, adding that these send a signal to countries not aligned with the west to consider the security of their asset allocations, trade relationships and industrial chains.