China is taking fresh steps to streamline its financial sector-narrowing its focus on heavily indebted local governments -- to help fine-tune a transitioning economy, whose fundamentals remain strong.
On Saturday, China’s top legislature announced that local government debt in 2015 cannot exceed $2.51 trillion. The ceiling imposes significant restrictions on fresh borrowing, for provincial governments had already accumulated a debt of $2.4 trillion by 2014.
Chinese authorities are focusing on stricter regulation of the financial sector to ensure enough liquidity is available to spur the real economy, which is transitioning from relatively low-end manufacturing to a challenging services oriented and technology driven “new normal” plain. Besides, the government wants to defuse bubbles, before they grow large enough to undermine investor confidence, by imposing fresh pressure on the markets. Global markets were roiled last week, hit by the cascading impact of last Monday’s stock market blowout in China.
Intervening to prevent a loan default, Chinese authorities have allowed local governments to issue additional bonds to the tune of $200 billion, raising the limit of debt-for-bonds swap to $500 billion dollar for 2015.
Since the local governments have already issued $300 billion worth of bonds by August 27, they will be able to use the mechanism to raise another $ 200 billion for the rest of the year.
Data from China’s National Audit Office shows that by the end of the year, the provinces have to pay around $300 billion for servicing their debts, incurred mainly on account of heavy infrastructure investment that had been made earlier to lighten the impact of the 2008 global financial crisis.
Analysts point out despite the recent market turbulence, the fundamentals of the Chinese economy remain strong. In an article in the Financial Times , David Daokui, a former member on the monetary policy committee of the People’s Bank of China — the country’s Central Bank-- pointed out that the plunge in the Shanghai Composite Stock Index last week is not the real problem. “The problem — not a huge one, but a problem nonetheless — is the Chinese economy itself. It requires corrective action from Chinese authorities — not surgery, but acupuncture,” he observed.
Observers say that the government needs to take three concrete steps to ensure a calibrated course correction. First, borrowing costs for households and businesses, which remain exceptionally high in China, need to be lowered through an interest rate cut in order to stimulate real growth. This should not be a problem given the high rate of saving in the country.
It is also necessary that job creating infrastructure projects are swiftly implemented through a coordinated effort to streamline the availability of land and funds to execute well defined engineering plans. Besides, there is also a growing opinion that President Xi Jinping’s rolling anti-corruption campaign could be fine tuned to ease worries among core officials that they would not be falsely netted in the clean up drive.
