China Cuts Debt While Sustaining Economic Growth
(Bloomberg View) -- China is serious about weaning itself from debt and even more serious about keeping its economy stable.
Achieving these goals might seem like a contradiction, given that unwinding a credit binge tends to restrict economic activity, at least in the short term. And if the skirmish between the U.S. and China on trade does degenerate into a war, then pumping a bit more money into the economy doesn't seem like a terrible option. It's hard to imagine a huge Chinese fiscal leap like the one undertaken in 2008 during the global finance crisis.
The key to threading the needle between deleveraging and growth lies in a huge change in the nature of China's economy, one that is still poorly understood in the West. That is the increasing dominance of services and consumption, which now account for the bulk of gross domestic product. They grow faster than old-line industries and, critically, soak up much less credit.
Many Americans and Europeans still think of China as a low-cost, sweatshop factory setup. The same people will typically attach great import to whether pieces of economic data exceed or fall short of estimates by one-tenth, or a few tenths, of a percentage point -- as though that is a smoking gun, evidence of data manipulation by Beijing. The real story the past few years has been that manufacturing -- while still big and not as cheap as it once was -- accounts for a diminishing chunk of what's become the world's second-largest economy, behind the U.S.
Manufacturing is very dependent on loans, most of them from state-run banks. In the past year, credit growth in China's economy slowed to about 12 percent, down from a bit more than 16 percent in 2016, JPMorgan Chase & Co. estimates. Most of that decline has fallen on manufacturing. Services respond more to changes in the labor market and technological shifts than they do credit-market tides, JPMorgan found.
Reining in debt could accomplish two goals: Enhance financial stability and shake up lumbering state-owned enterprises, which the government has been trying to do for years -- with mixed success. Why is it important to reduce debt? Although China's economy can seem like a juggernaut, it's a leading candidate for a banking crisis, reckons the Bank for International Settlements. Few things would threaten economic and, therefore, political stability as much as a banking crisis. Hence, the need to rein in leverage.
The good news for China and the world is that the fastest-growing part of the economy will be relatively immune from efforts to tap the brakes. Viewed from this angle, at least, China can have it both ways.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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