Steady path ahead
- By Jin Zhongxia
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E-mail Beijing Review, April 22, 2014
QE exit: no threat
There are worries that the U.S. withdrawal of QE may cause economic turbulence to China. Unlike other emerging economies whose current accounts are in deficit while their capital accounts are in surplus, China has achieved a basic equilibrium in its balance of international payments and kept a low level of inflation as well as a low level of foreign debts. For other emerging economies, both the current accounts and the capital accounts would be in deficit if the QE was cut, which could result in a sharp decrease in their foreign exchange reserves and spur a currency crisis.
However, the withdrawal of QE will not trouble China, but means an opportunity to enhance the country's macroeconomic regulation. In the past few years, as both China's current and capital accounts were in surplus, excessive appreciation of the yuan posed a threat to the Chinese economy. Against the backdrop of excess liquidity in the domestic market, it is necessary for the central bank to hedge its risks, which will also inevitably bring unwanted side effects. If China positively reacts to the impact of the QE exit, its current account surplus will be balanced by its capital account deficit, realizing a balance of international payments. Besides, as international hot money leaves China, it is possible for the central bank to ride the wave and cut the reserve requirement ratio to increase liquidity and reduce the opportunity for regulatory arbitrage. It will also eliminate the threat brought by excessive yuan appreciation and stimulate exports at the same time.
Overcapacity easing
Indeed, overcapacity in some industries is a problem China is suffering from. But there are signs that the problem can be alleviated through industrial restructuring. Loans to industries with overcapacity have been on the decline and loans to emerging industries are on the rise. As the developed economies are beginning to pick up, the productivity of some industries that were previously plagued by overcapacity will recover, such as the shipbuilding industry. Strong demand for investment in emerging green energy industries, such as new-energy vehicle manufacturing, will see the excess production finding a way to be consumed. Besides, China's production capacity at the high end of the value chain is still seriously insufficient and the density of its railway and highway networks is lower than that in developed nations, leaving much room for more investment.
China's urban construction and management are still at a low level: Drainage facilities are poor, transportation from residential areas to business districts is inconvenient, underground space hasn't been fully utilized and development of megalopolises is slow. While increasing its urbanization rate, China needs to build better social facilities to improve care for senior citizens. All of these provide opportunities for industries with overcapacity.
No real estate risk
High housing prices in cities like Beijing and Shanghai are actually not creating a bubble. The limited land available in big cities cannot satisfy the demand for rapid urbanization. The housing price decline in third- and fourth-tier cities doesn't mean the real estate bubble is bursting and cold data alone cannot provide conclusions for the state of China's real estate market. For instance, when every household possesses more than one property on average, China's real estate market will be saturated. This argument actually does not measure up to the facts. As China has a large floating population, it is normal for people to have more than two properties—one in their hometown and the other in the city where they work. If they rent an apartment in city, it means that some urban households need to have more than one property. Financial risk in the property market is also not a worry, as the down payment sum of the mortgage is usually large and the mortgage loans are usually of high-quality capital for banks.
The author is director of the Financial Research Institute of the People's Bank of China.
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