China faces a toxic cocktail of slowing economic growth, a rapidly deflating credit and real estate bubble, the threat of rising corporate default rates and an increasingly precarious, debt-ridden financial sector, a top mainland academic has warned.
Bai Chongen, chair of the department of economics at Tsinghua University in Beijing, has warned of a series of daunting challenges facing China as it seeks to navigate a carefully managed transition to a more consumption-based economy.
Topping his list of concern is a rapidly deflating real estate sector, and the looming threat of mass defaults by highly leveraged property developers.
“The big threat is property developers,” he told Emerging Markets. “With property sales slowing, and prices topping out, developers are facing liquidity issues. If there is going to be a big risk to the economy over the year to come, that’s the area we should keep a close watch on. And it’s a sector that is really largely out of the government’s control. If we don’t manage the problems likely to face real estate developers over the months to come, we may have a real problem.”
Bai, who is also a key economic advisor to the central government, cautioned that China’s problems went far beyond the challenge of coping with the dog days of a 15 year property cycle. Slowing growth in the world’s second largest economy would also accelerate the number of corporate defaults. Earlier this year, the government allowed a privately-run solar power equipment maker, Shanghai Chaori, to default on its local debt. Bai applauded that move, but fretted about future “contagious effects from rising default rates”, an issue that “really concerned domestic regulators. We have a lot of instruments [in our arsenal] to ensure that things do not spiral out of control, but this is a major worry.”
FINANCIAL SECTOR FEARS
Rising defaults stemming from a slowing economy would, he added, heap further pressure on a banking system already struggling with rising non-performing loans and a paucity of liquidity. “The financial sector is another area of real concern,” he added. “Going forward, banks are going to face more risks. They aren’t controllable, and I don’t think we’ll face a financial crisis in the months ahead, but the problems are mounting fast.”
Bai also highlighted the danger of a spooked government rolling out a new package of stimulus spending as growth slows. The World Bank tips mainland GDP to come in at 7.4% in 2014, around the level that Beijing deems necessary to produce enough jobs to pre-empt social unrest.
But economists warn that the real growth level could be as low as 5%, a rate that could lead to a new round of economic pump-priming. “I worry about kneejerk reactions to a slowing economy,” he said. “Why are we so concerned about slowing down? I know there are political pressures to keep growth above a certain level but we should from next year be looking at a lower growth rate target. We need to be more tolerant of a slower growing (China), so long as growth doesn’t drop too sharply.”