Bloomberg’s Tom Orlik: Even painful, China needs deleverage

Dec 2, 2017, | by Naanga

Beijing, China — Bloomberg economists expect China’s economic growth to further moderate to 6.4 percent in 2018, to 6.2 percent in 2019, according to a survey conducted by Bloomberg News.

“The Chinese economy is going to slow towards mid-single digits, 5.5 percent by 2020,” said Tom Orlik, the chief Asia economist for Bloomberg Intelligence.

Not only Bloomberg is de-escalating the second largest economy’s estimation, but also IMF, Morgan Stanley, and UBS will moderate in coming years outlook.

Why Chinese economy is slowing down?

China’s GDP growth reached to 6.9 percent a year earlier in the first three quarters, meanwhile the government’s targeted growth of 6.5 percent for the year.

Before the financial crisis the Chinese economy grow because of the export,” said Tom Orlik. After the financial crisis, China had to find a new way to boost the economy because of the economic weakness its main consumers — the U.S. and Europe. “That driver of the growth was bank loans, local governments, and state-owned enterprises to pay through massive national investment program, [which is] building subways, roads, railways and new industrial capacities. All those are paid by credit,” he explained.

As a result of that, total borrowing climbed to about 260 percent of the economy’s size by the end of 2016, up from 162 percent in 2008, and will hit close to 320 percent by 2021 according to Bloomberg Intelligence estimates.

Screen Shot 2017-12-02 at 4.11.14 PM
Credit to Bloomberg

 

Greece and Korea’s case of financial crisis, the borrowing came from overseas, in comparison, China’s debt is fueled by domestic, which means the financial crisis is not easily confronted them. But they could not handle this combination in the longer period, according to the Tom Orlik’s speech at Tsinghua University.

China’s overall economy dragged down by nonviable “zombie” firms and debt-ridden state-owned enterprises,  according to a new report by the International Monetary Fund. Resolving these weak firms, through deleveraging, reducing government subsidies, as well as operational restructuring could generate long-term economic growth by 0.7 to 1.2 percentage points per year.

Coming challenge — Deleverage plan

Zhou Xiaochuan, the governor of China’s central bank, promised more measure to deleverage step by step.

“That is the right policy. China needs to deleverage. The same time, deleveraging might be painful,” said Tom Orlik, a chief Asia economist at Bloomberg Intelligence. He warned, “We can leverage up as fast as we like, when we deleverage, we have to it in a cautious and incremental way.”

A Bloomberg economist said that debt growth pushes forward the Chinese economy, including employment, households income, real estate prices. But if deleveraging goes wrong, slowing growth of credit might drag down economic growth, employment, interest rate and housing.

China will confront a challenge to ease up credit stimulus in the next five to ten years.

       

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