The Chinese strategy to reduce debt: reduce efforts

06/04/2018

An American study reveals that China could decrease its growth efforts to reduce debt

 

According to the US-based investment firm Pacific Investment Management, the Chinese government will impose lighter measures to reduce debt, thus decelerating economic growth. Indeed, China’s campaign to curb financial leverage may become less intense this year as growth in the economy decelerates. Also a Bloomberg survey of economists last month showed expectations for more stabilisation.

The forecasts predict that total debt likely to be 260 per cent of gross domestic product at the end of 2018, the same as a year earlier. Roland Mieth, emerging market portfolio manager at Pimco, said: “The new element this year is that growth momentum is probably going to slow down” with the economy probably expanding at about 6.4 per cent from 6.9 per cent last year and “the pace of financial deleveraging may be more gradual and less intense than last year”.

 

“We still think more will come,” said Mieth. “Because of that we are closely monitoring onshore developments on that front.”

 

According to Mieth, the Chinese debt will essentially be resolved with two strategies: the first, which provides that the insolvency of private companies are paid locally, and the second, which provides that state companies will be supported by the state.

“Over the long term, there is a recognition that defaults in China will increase,” said Roland Mieth. “It’s not necessarily a negative event for the development of China’s onshore financial market. Efficient and well-implemented risk allocation is important for international investors to actively invest in the onshore corporate bond market.”

Even if an LGFV defaults, it will be allowed to default by the government and the regulators in a way that doesn’t jeopardise the overall financial stability in China,” conclude Mieth.

 

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