PBOC’s Ma Says Credit Curbs Mean Short-Term Pain, Long-Term Gain

Curbing excesses in corporate credit can harm economic growth for two or three years, according to Ma Jun, chief economist of the People’s Bank of China’s research bureau.

While corporate deleveraging is a long process requiring seven years or longer, it can hurt growth in the early stages of addressing the issues, Ma said in a working paper published Wednesday. He said the economy will see a steady rebound in the longer term after excess capacity has been reduced and company profits start increasing.

"In any country, the intensity of efforts to cut credit determines its spillovers to the economy," said Ma, who doesn’t have a direct policy-setting role at the central bank. The short-term impact can be effectively controlled if accompanied by reforms such as orderly closures of unprofitable zombie companies and better equity financing, he said.

Ma, a former chief China economist at Deutsche Bank AG in Hong Kong, comments as deleveraging appears to be gaining support among leaders after total debt soared since 2008 to almost 2.5 times the size of the economy. The Communist Party’s People’s Daily published an interview last month with an unnamed top official who said excessive debt was China’s “original sin” and it can’t borrow its way to long-term economic health.

Ma’s paper was published in the PBOC’s regular mid-year update along with the research bureau’s economic forecasts. The estimate for 2016 real GDP growth was maintained at 6.8 percent while lowering the projections for exports and raising them for inflation.

While reining in credit growth "calls for political courage, it is feasible and economically preferable to increasing leverage to achieve overly ambitious growth targets," Louis Kuijs, head of Asia Economics at Oxford Economics, wrote in a recent report. Still, he said doing so requires re-interpreting economic growth targets through 2020, and there will be international spillovers especially among commodity exporters and Asian neighbors.

— With assistance by Yinan Zhao

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