Tough measures needed to deleverage real estate and bail out local governments

Ni Tao
Local governments should publicize their balance sheets,expand the supervisory role of local legislatures and even allow some county-level governments and platforms to fail.
Ni Tao

WHERE is Chinese economy heading in 2018? This is a question that has occupied many economists of late.

Ma Jun, director of Center for Finance and Development at Tsinghua University, believes that the challenges this year for Chinese economic decision-makers are to address systemic financial risks, implement structural reforms and leverage the Belt and Road initiative (B&R) to achieve new growth.

Internally, the Chinese economy faces two kinds of downward pressure this year: slower growth in home sales and dwindling investment in the property sector, and the suspension of many PPP (public-private partnership) programs, which resulted in a decline in infrastructure spending, Ma said at a recent forum held by Fudan University’s School of Management.

There are, however, reasons for a little optimism. China’s manufacturing sector posted a 20 percent increase in profit last year; and better export figures are expected this year thanks to the rebound of the international economy.

Ma noted that China’s GDP growth will moderate to 6.5 percent this year, roughly 0.4 percentage point lower than last year. Since 2011 the country’s working-age population has decreased sharply, with 3 to 4 million people leaving the work force each year. This is why, Ma explained, that we do not have to worry too much about the decline of GDP growth, because as fewer jobs are created, so is the number of those seeking work.

But he did not mention how China’s dwindling work force might be able to support its rapidly growing legion of pensioners.

Of all the risks that might derail the economy, Ma singled out the financial risk, for he believed it poses one of the biggest threats. The higher leverage ratio is largely to blame for heightened financial risks. The leverage ratio is a financial gauge of the share of capital that comes in the form of debt.

Many businesses and even local governments borrow extravagantly to fund their projects. As a result, the prospect of default looms large, and massive defaults will lead to a financial crisis.

After analyzing the leverage ratios of different types of businesses, Ma concluded that those with the highest leverage are real estate companies and state-owned enterprises, especially the so-called local financing platforms.

Ma observed that sweeping reform measures are needed to deleverage the real estate sector and bail out many debt-ridden local governments.

According to Ma, the authority must introduce a national property tax to stem speculation in the market.

In the past, pilot programs were implemented in Chongqing and Shanghai to introduce a property tax.

“This will help clarify the nature of homes as an abode rather than a commodity targeted for speculation,” said the 50-something economist.

This measure will have vastly positive implications for the country’s long-term financial and economic stability.

GDP targets

Of course, in the short and medium run, popular opposition to property tax can be expected, and thus this will be a major test of the resolve of policy-makers. Meanwhile, the impact of property tax ought to be cushioned with more supply of land and public rental housing, said Ma.

Like many of his peers, Ma railed against the setting of GDP growth targets, because this tremendously “contributed to the ballooning local debts.”

Instead, he suggested that authority replace GDP growth targets with employment targets.

Ma also advocates more fiscal transparency.

“Local governments should publicize their balance sheets, enhance transparency of hidden debts, expand the supervisory role of local legislatures and even allow some county-level governments and financing platforms to fail,” he said.

When it comes to investment opportunities in 2018, Ma said three are most obvious. The first is green growth. In the future, the country will invest more in new energy, “green” transportation, and the potential benefits are an average 15 percent growth or more in environment-related industries each year, said Ma.

The second opportunity in his view will come from the Belt and Road Initiative. The initiative will likely create an annual demand for US$1.5 trillion in infrastructure spending in the 65 countries involved in the initiative.

Expected investment will total US$5 trillion per year. The market potential is huge. Besides, B&R countries, in particular India, Indonesia and Vietnam, have enough young, working-age populations to support the Chinese businesses that relocate there.

The third opportunity Ma specified might turn out to be a mixed blessing. On the one hand, the development of artificial intelligence will empower many industries and enhance efficiency.

On the other, a higher rate of automation in factories, and offices will threaten job security and exacerbate the already yawning divide between rich and poor.

These are some of the questions that economic thinkers will have to ponder, said Ma.

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