People who are predicting the collapse of China’s economy are being driven by panic and are ignorant of fundamentals.
China can ease these concerns by standing by its promise to stabilize the financial market.
A stable renminbi is key to shoring up market sentiment.
In recent weeks, renminbi speculation has been so rampant central bank governor Zhou Xiaochuan had to restate the government’s currency policy.
Zhou seemed to have calmed the market. The spread between onshore and offshore renminbi has narrowed.
China might tighten capital controls to stem fund outflows.
With huge foreign reserves, it has the means to restore order in the financial market.
The size of that war chest has been shrinking but we expect it to remain above US$2.8 trillion by the end of the year.
An open and stable capital market is a priority for the Chinese government.
The impending start of cross-border stock trading between Shenzhen and Hong Kong is expected to attract more foreign investment.
In the long run, international bond investments via the qualified foreign institutional investor scheme will cement the Chinese financial system.
But some people have expressed worries about China’s high leverage. I think they have not bothered to find out what kind of debts these are.
More than 95 percent of these debts are from state-owned banks and most of the borrowers are state-owned enterprises (SOEs) that are undergoing reform.
SOE debt accounts for about half of the total by financial institutions.
China has much better control over its public debt than most countries.
Even if the situation worsens, financial authorities have plenty of flexibility to deal with it.
Fiscal and monetary policies will continue to favor efforts to create a consumption-led economy from a manufacturing-based model.
We expect the central bank to cut interest rates once or twice more. The reserve requirement ratio is likely to be cut 250-450 basis points within the year.
These efforts will be enough to cushion a worst-case scenario.
The ratio of fiscal deficit to gross domestic product might increase to 4 percent in 2016 from 3.5 percent in 2015.
Still, the chances of the economy lapsing into a systemic crisis are limited.
Although the industrial sector continues to grapple with excess capacity, the service sector is showing a lot of promise.
This article appeared in the Hong Kong Economic Journal on March 22.
Translation by Myssie You
[Chinese version 中文版]
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