Will China Be Able to Stick to Its Reform?

China

The Chinese government has been working on radical economic reforms for this year. It has been working to stabilize and keep fiscal policy predictable, as well as trying to transition its economy from investment based to consumer based. One big problem it’s had on its plate has been the enormous weight of local government debt needing to be dealt with. Now, according to Bloomberg, the nation’s credit dropped by what is likely a record amount, meaning that expansion of China’s economy could be in for a tough year, likely to suffer under the debt load.

So far, the Chinese government has been strongly in favor of debt reduction efforts, even if it means sacrificing growth — but Yao Wei, the China economist with Societe Generale SA, told Bloomberg that this might not last. “Their focus is more about containing debt growth. Sometime over the course of 2014, they will realize the slowdown, the deceleration, is worse than expected and they will loosen their stance a little bit,” he said.

“For the sake of long-term sustainability, China should endure further growth deceleration than we are seeing now,” said Wei. An average of economists to Bloomberg put the expected aggregate financing for China at 1.15 trillion yuan, with a height of 1.5 trillion yuan, and a low expectation of 1.04 trillion yuan.

Among the dangers to China’s economy at present is the practice of shadow banking. The Chinese cabinet has begun to deal with the need to regulate such practices, creating new rules hitting at undocumented loans. According to Bloomberg, both lenders and borrowers involved in shadow banking transactions are at risk, making the harsher and better enforced rules a necessity.

“Though we don’t expect a nationwide debt and banking crisis, we believe the chance of some bond and trust loan defaults will rise significantly in 2014. The government may also need some defaults to develop a more disciplined financial market,” Lu Ting, a Hong Kong economist, told Bloomberg.

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