Economists attend a roundtable discussion at the 2015 International Finance Forum (IFF) in Beijing, Nov. 6, 2015. (Photo: China News Service/Liu Guanguan)
(ECNS) -- Economists warn that over-investment in certain areas is posing a big, if not the biggest, threat to the Chinese economy, and that deleveraging is urgently needed for healthy and sustainable growth.
The view is shared by most economists attending a roundtable discussion at the 2015 International Finance Forum (IFF) in Beijing, which runs from November 6 to 8.
According to Standard Chartered, China's overall debt stood at 142 trillion yuan ($22.9 trillion), or 245 percent of GDP, as of March 2014. Previous studies concluded that a percentage higher than 90 percent signals a decline of economic growth.
"The fast buildup of debt has become the biggest financial risk for China," said Zhu Haibing, JP Morgan's chief China economist, adding that many international institutions have warned about credit bubbles in emerging countries, including China.
Cui Li, deputy director of the IFF Research Institute, echoed that sentiment, saying that "deleveraging while maintaining growth momentum will be the biggest challenge for China's future development."
The International Monetary Fund (IMF) issued a report saying that local government debt will take up 45 percent of China's GDP, and that the total debt to GDP ratio will surpass 250 percent by 2020.
With China's investment-driven growth model, banks have been pouring money into specific industries for over a decade to boost the growth rate. This has resulted in serious overcapacity, in which demand for products is less than potential supply.
"We're seeing investments that are not good, and corporations that should be bankrupt surviving," said Xiao Geng, executive director of the IFF Research Institution.
China has found it hard to slow output with external demand or more stimuli, and the debt has led to mounting repayment pressures.
It's worth noting that major financial crises, such as the one that broke out in the United States in 2008, and the sovereignty debt crisis in Europe, were all ignited by debt to some extent. Will China suffer from a similar crisis?
"I would say the possibility is slight," Zhu said. "The problem of bad loans is worsening but is not out of control. Most of China's loans are domestic ones, and China has large savings to cover that. Besides, China's banking system is not yet entirely market-oriented, which means it's still available for government manipulation when necessary."
The Chinese government has taken deleveraging measures for years, such as telling banks to rollover debts, expanding the bond-for-debt swap program, issuing low-yield municipal bonds to replace legacy liabilities, and lowering interest rates.
Reining in debt is also mentioned in the newly issued 13th Five Year Plan, which maps out what China's future will be like in 2020.
Economists suggest that China should continue using fiscal policies to deleverage and pick the right industries to invest in, such as innovative or green industries.
"One key measure is to gear the financial market toward one that supports green and innovative industries as well as consumption," said Song Min, director of Hong Kong University China Financial Research Center.
The economists argued that deflation and tax inequality are also major challenges facing the China economy, among others.
The IFF is an independent organization initiated by over 20 countries in 2003, and a platform for global high-level dialogue and academic research in the financial field.
