NEWS Release - Rebalancing China: International Lessons in Corporate Debt
By David Lipton, First Deputy Managing Director, IMF China Economic Society Conference On Sustainable Development in China and the World June 11, 2016 Shenzhen, China
Introduction
I would like to thank the Chinese Economists Society for this warm welcome. I am honored to join you today for this discussion of Sustainable Development in China and the World.
Shenzhen is a most appropriate place for this subject. The city is a symbol of China’s rapid rise to prosperity. It has gone from farmland to financial center in a generation, embodying the hopes of modernization and opportunity.
But Shenzhen is also emblematic of what it means to face China’s changing economic and financial landscape. Over the past year the city has faced unaccustomed uncertainty. Financial markets have lost ground, and rising costs have led some high-profile corporate citizens to shift operations elsewhere in China. These developments underline the challenges that must be addressed to ensure a secure future in a rapidly growing city.
The same can be said of China as it looks to achieve sustained and sustainable development. The same financial market tremors that shook Shenzhen led many Chinese to question how certain they were about China’s future path. Now some wonder what rebalancing will bring and whether issues like corporate indebtedness and financial sector weakness could alter the trajectory of China’s “new normal.”
China’s challenges are manageable. But rebalancing requires a range of actions – not just making way for the new, but also the smooth downsizing of whatever is outmoded or overbuilt. Each needs to be done in a timely fashion if China is to move along a desirable path and avoid dangerous detours. Whether you look at the history of economic transformations or the aftermath of the Global Financial Crisis, bold and determined action is rewarded—while missteps are penalized.
What I propose to do today is discuss the debt issue by taking three themes in turn:
First, describing the IMF view of China’s economic rebalancing effort;
Second, outlining the scale of the debt issue; and
Third, examining some strategies for addressing corporate indebtedness in light of international experience.
My purpose is to offer the IMF’s perspective on policies that have proven effective in other countries facing issues in their development that may have relevance for China’s. I say this acknowledging that China’s situation is unique and the scale and stakes of its rebalancing unparalleled.
Rebalancing is an issue that is crucially important to China’s future—and for the global economy. We have learned over and over in the past 20 years how disruptions in one country’s economy and markets can reverberate worldwide, witness the spillovers from last year’s sudden instability in Chinese markets. The point is that any discussion of sustainable development must take into account the vulnerabilities facing a systemically important economy—and the steps needed to remedy them.
Assessing Rebalancing
Let’s begin with the economic rebalancing at the heart of the 13th Five Year Plan, the blueprint for China’s ongoing development. The strategy is rooted in the understanding that China needs to rebalance its economy. How is this effort progressing?
Growth remains strong by any standard, perhaps with the sole exception being the last 25 years in China itself. Growth in China last year alone added to GDP an amount equivalent to an entire mid-sized European country like Sweden. So it is important to maintain a sense of perspective during this time of change.
On the external front there has been substantial adjustment. The current account surplus has come down from the peak of 10 percent of GDP in 2007 to around 2-3 percent in recent years, and the contribution of net exports, formerly a key driver of growth, has been fluctuating around zero. Last year’s surge of capital outflows has slowed, and the effective exchange rate has remained broadly stable. A measure of China’s progress was recognized by the IMF’s decision last year to include the renminbi in the basket of currencies making up the Special Drawing Rights after determining it is a freely usable currency.
At the same time, the results of China’s domestic rebalancing have been mixed. There is moderate progress reorienting the economy from investment to consumption, with the latter having contributed about two-thirds of growth in 2015. Growth is being driven less by heavy industry and exports and more by services and manufacturing for household consumption than in the past. These are important developments.
An area that has seen limited progress, and the one I want to delve into here today, is addressing corporate indebtedness and restructuring. The government is rolling out a reform plan for State-Owned Enterprises and has announced capacity reduction targets in the coal and steel sectors. Yet, with the rapid increase in credit growth in 2015 and early 2016, and the continued high rates of investment, the problem is growing. This is a key fault line in the Chinese economy. It is surely within China’s powers to address this problem. And it is important that China tackles it soon. The question is how best to do so.
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