10 predictions for China's economy in 2015 (Part II)
- By Zhang Rui
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E-mail China.org.cn, November 5, 2014
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A guide introduces city planning details for a group of visitors at a property sales center. [File photo] |
7. The central government will increase leverage to sustain the economy in the face of credit risks
The whole Chinese society's debt ratio is about 210 percent. The debt risk is under control. Government and households have a relatively low debt ratio, so there is still room for leverage. In 2015 the central government will shoulder more responsibilities by keeping up with targeted easing to increase leverage of projects aimed at maintaining steady economic growth, which will win more time and room for the country's on-going reform.
With the fading of external demand and the property dividend, it is a must to increase leverage in order to sustain economic growth. It is highly possible that the debt ratio will continue to expand in 2015, so uncertainty lies in whether some of the projects could increase their efficiency of leverage. It means paying attention to state enterprises to see if the reform will increase the competitive power of the state enterprises, and paying attention to local non-transparent debt sources to see if they will be effectively restrained. Under the control of a borrowing limitation, local governments can be allowed to issue bonds and the income and expenses of the general debts are allowed to be managed in the public budget realm. The government financing function should be stripped from the financing vehicle. The development direction for local debt will be to channel social funds to the construction of infrastructure.
Credit risks will probably go to the verge. Most debt stock will be kept to avoid systemic financial risks. Sporadic risks may occur: first, the economic downturn will make financial institutions hold back their risk appetite for private sector and pay attention to the credit risk of private sector. Second, the central government will curtail local budgets and there will be a commercialization of city construction investment bonds. We should be cautious of the credit risks caused by some city bonds which are outside the budget management or the bonds from the financially weak local governments.
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