ADVERTISEMENT

Beijing Pays the Price for the Slow Pace of Economic Reform

China, which just suffered its first economic contraction in two decades, is conspicuous for its stinginess.

Beijing Pays the Price for the Slow Pace of Economic Reform
A pedestrian wearing a protective mask walks past as others sit on steps at a shopping area in Beijing. (Photographer: Giulia Marchi/Bloomberg)

(Bloomberg Businessweek) -- As the world’s largest nations send out helicopter money amounting to well more than 10% of their gross domestic product to fight the economic effects of the coronavirus pandemic, China, which just suffered its first economic contraction in two decades, is conspicuous for its stinginess.

There are no cash handouts like the ones Americans have started receiving from Uncle Sam, or small-business loans that can be converted into grants. Instead, the stimulus estimate for China is almost embarrassingly small, at only 4% of GDP. Beijing is deploying indirect measures such as tax cuts, which aren’t so helpful to a business that can’t make any sales at all during the global lockdown.

So what’s the problem? Beijing is paying the price for the slow pace of the country’s financial reforms. When the U.S. government borrows money, it issues Treasury bonds, which are gobbled up by investors at home and abroad. Foreign governments, for instance, take up a good one-quarter of U.S. public debt. This isn’t the case in China. While the nation boasts the world’s second-largest bond market, there’s only one major buyer of its sovereign debt: state-owned banks, which own about two-thirds of them—and don’t trade them, but keep them until they mature. Foreigners hold only 10% of China’s public debt, despite all the talk over the years of yuan internationalization and market opening. So every time Beijing expands its fiscal deficit and borrows money, it has to consider whether buying its new bonds will prevent banks from lending money to the corporate sector.

China is scrambling. It recently allowed banks to operate in the sovereign bond futures market, essentially giving them a hedging tool in case they wanted to trade sovereign debt instead. But it’s a little late for that. Furthermore, big lenders have no incentive to aid small businesses. The diminutive scale of these loans, combined with a low maximum interest rate, mean the margins for big lenders are very thin. The big banks can make plenty of money taking deposits from the public—the rates they pay are kept artificially low by the People’s Bank of China—and lending it to the government. On-and-off talks on interest-rate liberalization, which would have allowed banks to pay more to depositors, have never gone anywhere.

As a result, the government has to order banks to lend to small businesses. Recent, detailed guidelines demand that big banks discover first-time lenders themselves, instead of competing to win regional lenders’ existing customers.

As Beijing is finding out, this recession is nothing like any other. It demands that China’s smaller businesses, which account for about 80% of urban employment, don’t go bankrupt and lay off workers. Despite all the reform talks, key elements of the country’s sprawling economy remain inefficient and bureaucratic, making them ill-fit to pull China out of a deep recession.
 
Ren is a columnist for Bloomberg Opinion.

©2020 Bloomberg L.P.