Although Chinese growth numbers are sliding in comparison to India, this may be temporary and based on curves in the business cycle; China’s economic fundamentals are stronger than any other emerging economy.
The vice governor of China’s central bank, Yi Gang, was not far from the truth when he said, “Chinese foreign exchange reserves are ample and reasonable.”
Thus according to him, expectations are high on the yuan; therefore it should remain steady and cross-border capital flows should be manageable. Last week, credit rating agency Moody’s downgraded China’s performance on sovereign debt from stable to negative, citing the Chinese government’s lackadaisical performance vis-a-vis implementation of economic reforms, rising public debt and lowering reserves.
However President Xi Jinping has reiterated China’s long-standing position that it must stick to its socialist principles. China’s economic agenda is a part of its global strategy, what it calls the “peaceful rise”. China aims to grow at between 6.5 and 7 per cent over the next five years; but Moody’s feels that China’s fiscal strength has weakened due to increase in borrowing across diverse sectors of the economy, and has led to stress in the financial system and state-owned enterprises.
The performance of state-owned enterprises has been the backbone of the Chinese economy and a much-extolled facet of its socialist system. Although weak economic growth has begun to increase pressure on policy banks -- state-owned enterprises that fund projects based on government advisories -- the Chinese government is trying to push more investment across sectors for the required economic expansion.
The downgrade of Chinese bonds will increase borrowing risks for China in the international financial markets. China’s public debt to GDP ratio in 2012 was 32 per cent and in 2015 stands at a gargantuan 40.6 per cent. There is a possibility that China’s target of 6.5 per cent growth may slow down structural reforms; with change in demographics and decreasing pace of investment, China must balance its policy objective of higher economic growth and reform measures that will eventually pave the way for a higher economic trajectory. The country’s foreign exchange reserves have fallen to their lowest in three years, to $ 3.2 trillion.
Its banking system should not become the burden many expect it to be. With a closed and inefficient financial system, China will fail in overcoming its public debt. Reforms are a must for China’s peaceful rise; growth can wait. China has consistently grown at over 10 per cent in the past three decades. Blindly seeking growth now will increase inequality, weaken its dilapidated banking system and in the long run prove disastrous for economic development. Reform is the way forward.
