4. People are paying close attention to whether the property market can sustain stable development and help investment and resources to flow into areas where they are truly needed. How would you see these two areas in 2017?
Certainly it's a good thing that the real estate market is growing quickly in China. However, we know from international experience that too fast a pace of growth in real estate can end in instability; it's not sustainable. So we think that the measures being taken by the government are appropriate and could facilitate the property market to grow in a more stable manner and a bit slower. It would actually be healthier if China's property market could grow a bit slower in 2017.
There're many factors in China affecting the relocation of resources to productive areas which would have higher impact on growth. One priority is moving resources for production from over-capacity industries and less productive firms to more productive ones. There is also a question about spending on infrastructure projects. Generally, we see the returns on such projects declining in many areas because Chinese cities already have pretty good infrastructure. Now, some infrastructure investments may be having a much lower impact on longer term growth and development. Many innovative and productive firms in China compete very well in world markets. If they can get more resources in the future, China will probably be better off.
5. What are your thoughts on Public-private Partnerships (PPPs) in China?
We think that PPPs have a lot of promise in China. There can be a good rationale for co-investment between the private and public sectors in many areas. China should note, however, that the world experience in PPPs is quite mixed. The experience in most countries has been a bit complicated, but there are success stories. China has increased the number of PPP projects very quickly, and is encouraging them as a way of rapidly increasing the volume of public financing. In this light, we think that China might benefit from being a bit cautious. Given the limited experience in China with PPPs in the past, and the encouragement that local governments have been given to expand their use, it is natural that the instrument might be used in appropriately in some cases. PPPs create contingent liabilities for government that can end up being a problem at a later date..
6. The research department of PBOC pointed out that compared to other economies, the ratio of debt and GDP in China's non-financial sector is still reasonable, while the leverage ratio of the corporate sector continues at a high level which keeps increasing. Would you give some suggestions for de-leveraging? Other countries' experience seem to show that for the first two years of de-leveraging there may be a negative influence on economic development, but after this period a rebound may be achieved. How can we control the short-term negative influence brought by deleveraging?
This is a very important question for China, because credit growth is still twice the GDP growth and the economy is becoming quite leveraged. For an emerging market like China, the level of credit debt is already becoming high, and may continue to increase unless measures are taken to bring it under control. We think that China will need to address this issue sooner or later. The longer that China waits, relying on its fiscal room and reserves, the most costly it could end up becoming. Even if accelerating the pace of credit growth can generate a bit more short term GDP growth, this could a growth disruption or slowdown in the medium term. We therefore think that it would be wise for China to continue strong efforts to bring credit growth under control.
While the impact on short term growth may be negative, we should keep in mind that short-term GDP growth is not the only important economic indicator. What we care about most is the welfare of the Chinese people, and the income of the Chinese people has been growing faster than GDP. If money would be spent, for example, building roads or buildings that nobody is using, that would add to short-term GDP growth but bring no benefit to the people. So we think the government should continue to support policies to ensure that the income of the population grows faster than GDP. Fortunately, this is a natural trend for a country that is rebalancing away from exports and toward domestic demand. Even GDP growth slows down a bit more, it will still be very high by international standards. Thus, China can achieve simultaneously strong growth, rapid welfare improvements, and deleveraging. Increasing incomes of population also directly feed domestic demand, which is driving growth. China cannot rely on exports any more to drive growth, given the world economic situation. So it's domestic demand that drives growth.
So the rebalancing process is not necessarily a painful thing for the general population, although social support for workers directly affected in poorly performing industries is extremely important. The welfare of the Chinese people can continue to grow very quickly even if the GDP growth rate becomes somewhat lower.
