In the National People’s Congress meeting concluded last month, the Chinese premier Li Keqiang announced that his government would raise its deficit from 2.3 per cent of gross domestic product to 3 per cent. This will increase the central government’s budget by about Rnb600bn. After a long detour of trying to boost the economy by supply-side measures, Beijing has finally reverted to fiscal stimulus. Local governments began to loosen their control on the real estate market even before the central government’s move. Those measures have begun to show their effect. Housing prices have started to go up again in first-tier and some second-tier cities; the price slump in inland cities has stopped. Steel prices have shown signs of recovery after a long period of decline.
Those developments, however, have not been positively received by the international business community. One day before the National People’s Congress, Moody’s shifted China’s sovereign rating to “negative outlook” because of the “uncertainty about the authorities’ capacity to implement reforms — given the scale of reform challenges — to address imbalances in the economy”. The triggering events were the Chinese authorities’ interventions in the foreign exchange markets and the stock market, both occurring since mid-2015. On March 31, Standard & Poor’s followed suit to cut the outlook for China’s credit rating to negative from stable, referring to its “expectation that the economic and financial risks to the Chinese government’s creditworthiness are gradually increasing”. It saw credit and fiscal expansion as among worrying trends.
Yet, the concerns of both Moody’s and S&P, and the international markets, are likely to be misplaced. China certainly faces the challenge of rebalancing its economy. It is difficult to get rid of the zombie companies in the sectors with excessive capacities while trying to avoid massive unemployment, and it will take a long time for the country to digest the large pile of housing stock. But dealing with such structural issues does not conflict with the authorities’ short-term moves to boost growth back to its potential rates. China’s potential growth rate will still be above 7 per cent as long as investment keeps a rate of growth above 12 per cent. However, the official growth rate for 2015 is below that, and the actual growth rate could be even lower. Therefore, it is natural for the government to gear up monetary and fiscal policies to stimulate the economy, just as any government facing a recession would do.
The level of government debt is not high by international comparison. Most important of all, as I have said many times, the majority of the debts are backed by assets, mostly in the form of infrastructure. This is the fundamental difference between government debt in China and that in industrial countries. In the latter, government debt is mostly used to finance welfare entitlements and has to be repaid by future tax revenues. In China, government debt can be recaptured by selling its assets when defaults happen.The market’s worry about the renminbi’s continuous devaluation is, at best, a result of panic. China’s current account surplus has increased since 2013, reaching $293bn in 2015. There is no external economic fundamental to support continuous devaluation. Internally, the government is determined to do everything possible to see the economy grow by at least 6.5 per cent, because this is the slowest rate that will allow household income to double by 2020, on the basis of 2010. In other words, growth is a political target. And when it becomes a political target, one should never question the Chinese authorities’ determination.
Likewise, maintaining a stable exchange rate for the renminbi is a political target. On January 18, Jack Lew, the US Treasury secretary, had a phone call with the Chinese authorities. But on this occasion, it was not his counterpart, vice-premier Wang Yang, but Liu He, the main economic adviser to President Xi Jinping, who took the call. The international media focused on Mr Lew’s concerns about China’s intervention in the exchange rate and stock markets; China’s domestic media focused on Mr Liu’s move to the forefront of international diplomacy. Both missed the key message sent by Mr Liu’s appearance: it marks a political commitment by the Chinese authorities to maintain financial stability, including a stable exchange rate between the renminbi and the dollar.
The worry about the depletion of the China’s foreign reserves is equally misplaced. Their fast decline in the last few months of last year showed that the authorities were willing to pay a high price to defend the renminbi’s value. Shorting the renminbi is a losing gamble that a rational speculator should avoid, unless he is single-mindedly bent on destroying the country’s foreign reserves.
Yao Yang is director, China Center for Economic Research, and dean, National School of Development, Peking University