Will China succeed in restricting credit and pollution?

Chinese share values have performed very well. The Shanghai Composite Index grew by 11% while Hong Kong’s Hang Seng Index grew by 37% in the year to November.

Just as in the USA, Chinese technology stocks such as Alibaba and Tencent have risen sharply. However, China’s heavy indebtedness continues to concern investors. Chinese borrowing stands at US$28tn which is 250% national GDP.

The IMF increased its forecast for Chinese expansion in 2017 from 6.2% to 6.7%. It stressed that this was the result of Beijing putting a higher priority on hitting its growth target than on the quality of the economic output. The Chinese government pledged to double the size of the economy between 2010 and 2020 and is prepared to see non-financial sector debt rise rapidly in order to achieve its aim. If this occurs, the IMF believes that debt as a proportion of GDP would rise to almost 300% by 2022 The IMF’s experience suggests that China’s credit growth is already on a dangerous trajectory with increasing risks of a disruptive adjustment or a marked growth slowdown.

The IMF have expressed concern at the methods used to keep the Chinese economy expanding though a combination of government spending on infrastructure projects and a willingness to allow state-controlled banks to lend more for speculative property development. It said the buildup of public and private debt would limit the ability of the Chinese authorities to act in the event of a financial crisis. While the IMF has warned about these dangerous debt levels, other analysts consider these fears overplayed as the Chinese government owns the country’s banks and will stands behind them and their borrowing.

The 19th Chinese Communist Party Congress was held in October and established President Xi Jinping as China’s most powerful leader. With a strengthening of his authority his anti-corruption campaign will continue but there is unlikely to be any shift to greater political freedoms. We are also unlikely to see widespread privatisation of state owned assets. However some economic reforms are expected such as opening the financial system to foreign investment.

The new Chinese government wants to deal with the risks in the Chinese financial system by bringing credit growth under control, cooling the property market and improving China’s appalling pollution problem through emission limits. If the government does restrict credit and pollution, we are likely to see future growth slow to a sub 5% level but this growth will be more sustainable.

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