And this clampdown on credit reached as far as the shadow banking sector, a long source of concern about hidden debts in the financial system.
These measures show that the Chinese government is serious about controlling the debt pile and that steps taken have been substantial.
With the recent cases of monetary policy easing, it has been more a painkiller to the economy at a time of stress, not a steroid-like monetary stimulus that will
accelerate another build-up in China’s debt pile.
Longer-term, the debt build-up will be a management issue for the government, not a burden on the private sector.
Most of China’s debt is concentrated in the state-owned enterprise sector6 and owed to the government, rather than international institutions. In contrast, companies in the private sector, particularly those that are in the consumer-led sectors that are powering the new economy, have comparatively low debt levels.
Reforms: ongoing, with much more to come
China’s ability to grow not only rests on managing trade relationships and debt, but delivering on a reform agenda – and there has been marked progress in the
- Liberalization: opening up RMB forex derivative markets and domestic bond markets to direct foreign institutional investors, easing of restrictions on overseas investment in autos and financial sectors, expansion of free-trade zones to 11.
- Supply-side reform: capacity cuts in steel, coal, coal-fired power plants, reduced corporate and personal taxes, revisions to rural land laws and the launch of a new carbon trading scheme.
- SOE reform: three rounds of mixed ownership reform pilots across 50 SOEs, supervision of stateowned assets further streamlined.
- Social welfare and environment: medical coverage expanded to more non-hukou locations, relaxation of hukou policies in selected tier 2 cities.
And we expect to see further changes in the future, including the opening up of telecoms, internet, healthcare, and education sectors to foreign businesses, tax breaks for advanced manufacturing sectors, tougher controls on SOEs, and expanded social welfare.
Taking the lead
In summary, besides taking the lead in the global economy, China is taking the lead in addressing the near-term challenges it faces.
But focusing too much on challenges risks missing out on the investment opportunities that China presents.
There is a series of thematic trends driving China’s economy in the future, including the rebalancing of global capital toward Chinese markets, data-driven
innovation, industrial upgrading, sustained growth in the consumer sector, and the reorienting of China’s trade relationships.
So while there is lots of noise about China, most of it is negative, investors may want to take a long-term strategic view around the new trends and themes
detailed in this report. This approach has brought numerous benefits to investors in the past and, as China continues to take the lead in the global economy, the future should be no different.