China Crisis Odds Seen Lowered With Reforms From Meeting
The odds of a severe slowdown in China or a credit crisis will fall after a Communist Party summit in November as leaders tackle local-government debt and financial reforms, a Bloomberg News survey indicates.
Fifteen of 23 analysts said policies flowing from the meeting will reduce such risks, and a majority said the plans will help China become a high-income economy by 2030. Royal Bank of Scotland Group Plc sees freer interest rates and Barclays Plc says changing officials’ performance benchmarks may help contain local-government spending.
The confidence signaled by the survey contrasts with warnings this year by Societe Generale SA of Ponzi-style corporate financing and short-seller James Chanos saying that China will have a “credit event” within five years. At stake is whether President Xi Jinping and Premier Li Keqiang deliver on expectations for policy shifts to sustain 7 percent growth in the world’s second-biggest economy.
“The economy has reached the stage where reform is the only way to release growth potential and reduce risks, so for sure they will be doing it,” said Chang Jian, China economist at Barclays in Hong Kong, who previously worked at the World Bank. “The risk of too little being done too late is clearly there.”
After removing a floor on borrowing costs in July, authorities have signaled that a deposit-insurance system and an easing of deposit-rate limits will be next. The People’s Bank of China and U.S. Federal Deposit Insurance Corp. said yesterday that they signed an agreement to strengthen communication and policy coordination. Today China started publishing a “loan prime rate” calculated from nine banks, adding a market-based benchmark as part of interest-rate liberalization.
Leaders may expand efforts to make the financial system more market-driven and the yuan more convertible. Officials will also soon deepen development of the bond and stock markets and securitization, Chang said. Other financial reforms such as reducing state ownership of lenders will take longer, she said.
The survey was conducted from Oct. 11 to Oct. 18 and included economists and political analysts. Eighty-seven percent of respondents were somewhat, very or extremely confident in the government’s ability to implement a reform blueprint from the meeting while 13 percent were only a little or not at all confident.
Thirty-five years ago, a similar Communist Party gathering saw Deng Xiaoping and his allies inaugurate a series of reforms that began to open up China to foreign investment and loosen state controls over the economy. Next month’s gathering will be the third full meeting, or plenum, of the party’s current Central Committee, including Xi, Li, ministers and the heads of the biggest state firms and banks.
Asked which reforms are most needed now and most likely in the next 12 months, survey respondents ranked changes in financial markets and local-government funding as both most urgent and probable. Expectations were lower for reforms to the residence-registration or hukou system, which limits labor mobility, the rule of law and state-owned enterprises.
While the party may promise to further liberalize interest rates, the exchange rate and capital flows, the likely pace of progress is uncertain, said Lu Ting, a Hong Kong-based economist at Bank of America Corp. As officials grapple with risks from local-government borrowing, Lu sees a move to let those authorities raise long-term funds from bond markets.
China has pared its growth ambitions, targeting annual expansion of 7 percent this decade, compared with the 10.5 percent average pace of the last 10 years. While growth picked up in the third quarter to 7.8 percent, signs are mixed for the economic outlook.
International Business Machines Corp. (IBM), the U.S.-based computer-services provider, said this month that demand in China from state-owned enterprises and the government has “slowed significantly.” By comparison, BHP Billiton Ltd. (BHP), the world’s largest mining company, raised its full-year iron ore output forecast after China’s imports rose to a record. A Chinese manufacturing gauge rose in a report released yesterday.
Officials have been stoking expectations for policy shifts at the November meeting without providing details. The party’s Politburo said in August that the session will “discuss major issues concerning comprehensive and deepened reforms,” according to the official Xinhua News Agency.
To become a high-income society by 2030, China should redefine the government’s role and adjust the structure of state enterprises, according to China 2030, a report by the World Bank and the Development Research Center of China’s State Council, or cabinet.
While most analysts said the party’s policy reforms will reduce the odds of a financial crisis, four said they will have no effect on that risk and three saw an increase in dangers.
“The government intends to start a deleveraging process and so partly you have to slow down credit growth and that’s already affecting economic growth,” said Yao Wei, China economist at Societe Generale in Hong Kong. “Cleaning up bad debt means you have to let things fail.”
The Shanghai Composite Index (SHCOMP) is down 4.6 percent this year through yesterday as investors gauge the strength of the Chinese economy and the new leadership’s appetite for reform. A jump in money-market rates yesterday spurred concern that the government could tighten credit, while a surge in home prices in September added to the risk of a further clampdown on the property market.
The party may seek to ensure sustainable sources of revenue for local governments and limit their ability to become indebted, Standard Chartered Plc said last month. Options include raising local taxes so county governments can curb their dependence on land sales and switching some spending responsibilities to the central from local governments. Authorities should also give cities extra funds to integrate migrants into their welfare systems, said analysts led by Stephen Green in Hong Kong.
Huw McKay, senior international economist at Westpac Banking Corp. in Sydney, said the fall from grace of some senior party figures indicates a leadership that is willing to drive change in the face of opposition. A Chinese court today denied ousted Politburo member Bo Xilai’s appeal of his life sentence for graft and abuse of power.
For McKay, the most important policy moves will be fiscal. Getting those changes correct “is the key thing that is going to bring the economy back onto a more sustainable keel,” he said.
--Kevin Hamlin, Scott Lanman. With assistance by Henry Sanderson, Zhou Xin and John Liu in Beijing and Cynthia Li in Hong Kong. Editors: Scott Lanman, Paul Panckhurst
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