Davos 2020: Lower Growth, Higher Debt, Weak Investments—Zhu Ning On The China Story
“I don’t think we will continue to clock 6 percent growth in this decade,” says Tsinghua University’s Zhu Ning.
China is expected to grow at only 4-5 percent in the current decade as concerns over a ballooning debt pile of the world’s second-largest economy loom large, according to Zhu Ning, associate dean at Tsinghua University, Beijing.
“I do see China’s economy gradually taking a step down,” Zhu told BloombergQuint on the sidelines of the World Economic Forum 2020 in Davos, Switzerland. “I don’t think we will continue to clock 6 percent growth in this decade.”
China and the U.S. are engaged in a trade war. Further, falling factory prices hit company profits and rising consumer inflation hurt spending power in the world’s second-largest economy, which is on a gradual slowing trajectory.
The U.S.-China trade tensions, according to Zhu, will have a long-term impact than just impacting GDP numbers. The simmering tensions have put China’s dominance in the global supply chain and R&D collaborations at risk, he said.
To be sure, other economists BloombergQuint spoke with at WEF Davos 2020 remained divergent on the outlook for China. Fan Gang, director of National Economic Research Institute at China Reform Foundation, expects China’s GDP growth to stabilise around the 6-percent range in 2020. On the other hand, Harvard professor Kenneth Rogoff said China was most likely to grow at an average of 3 percent for the next decade.
China’s Three Unique Debt Problems
Government debt—that rose at its fastest annual pace in a decade in 2019—only added to China’s woes. Its national debt-to-GDP ratio stands at 270 percent, Zhu said, adding while this is lower compared to economies like Japan, it’s in the same range that the U.S. had before the global financial crisis of 2008.
Even if the absolute level of debt is not surprising, the trajectory by which it has been accumulating in the past decade is very concerning.Zhu Ning, Associate Dean, Tsinghua University
Zhu listed three reasons why China’s problem was unique compared to other sovereign debts.
First, the debt data is compiled from local governments who have every reason to understate their borrowings. “There still isn’t clarity about how accurate China’s national debt data is.”
Second, a large chunk of the debt in China was contingency-based which won’t kick-in unless the economy slows down or some extreme events were to happen. “We aren’t prepared for that.”
Third, most of the corporate debt in China comes from state-owned enterprises that are closely linked to or backed by the government, Zhu said. “It paints a very different picture if we group all state-owned enterprises’ debt as government debt.”
New Investments Hit A Roadblock
Zhu wasn’t too optimistic about a big wave of investments as there is very little room for undertaking fiscal stimulus or monetary easing from the government.
“China has done a lion’s share of work to stabilise the global economy after the global financial crisis, and as a result it has been accumulating debt.”
In December, China’s state economic planner announced that it would focus on filling in transportation infrastructure gaps in 2020, instead of a flood of investments.
U.S.-China Phase 1 Deal
- Having Phase-1 deal is better than not having any deal.
- Not expecting much progress until after the U.S. elections.
- Too early to say if we’ll have Phase-2 or Phase-3 deals.
- Expects big dip in spending during the Chinese new year due to the coronavirus outbreak.
- Consumer sentiment to be hit as people won’t go out as they would have done before.
One Belt, One Road
- China still working patiently on the Belt & Road initiative; slowdown is partly because of the confusion around what China is planning to do with the project.
- Slowdown of yuan internationalisation and increase in the national level of debt is constraining China’s hand in making bigger investments.
China’s Economic Leadership
- China will continue to be prominent in the next decade.
- The country is pushing very hard for sustainable growth, green growth and intellectual property protections.
- China is a symbol for emerging economies; many other countries are trying to follow the model.
WATCH | Tsinghua University’s Zhu Ning on the China story for the decade ahead
Here’s the edited transcript:
Last year, the New York Times quoted you as saying that the trade war is a good thing because you were hoping that it would actually push China on the road of the right kind of reforms. What do you make of what that year-and-a-half of the tensions has brought?
First, I want to make it clear. I think I was actually meaning the trade negotiation is a good thing to China. I meant not necessarily the process. Second, it is gradually panning out that China is pushing forward some of the reforms, which are, I think healthy to China’s economic growth. Such as environmental protection, unleashing more resources from the market, IP production. So, I think that is a healthy dose of messages for China which is partly being motivated by the negotiation along with the U.S. and maybe the rest of the world.
Finally, I think I want to emphasise that there is, despite the slowdown in the economy, still a great deal of momentum in China’s economy and the resilience as long as we’re seeing the reform. I guess a more market-based reform being pushed forward in China.
You’re also of the opinion as many other economists saw that the trade war hasn’t substantially impacted China’s economy. We do know for a fact that while exports to the U.S. may have declined overall exports in China have come down very marginally and you’re saying it hasn’t had as much of a domestic impact either?
Not at a moment. I don’t think that direct impacts for the GDP is something that we should be focusing on when we are talking about the impact of U.S.-China trade tension. I think we have to look beyond that. I mean one is on the technological transfer and technology collaboration area. We do see a big drop if not a slowdown in the collaboration between China and the rest of the world. This could have a very long-term impact on China’s R&D and economy.
Another big point is just the sentiment—both in the financial market and in the entrepreneurial spirit. If there is going to be an ongoing tension between China and the U.S., should I keep my investment in China or should I do something that keeps diversifying my risks.
Finally, I think people are talking a lot about the increasing uncertainty with the global supply chain. Now, are we going to have the entire supply chain within China or are we going to see a sort of diversification or retreating of a part of the operation from China. I think that’s going to be a much longer-term issue which we have to wait and see.
What do you make of the Phase 1 deal? Do you think it’s too little and do you believe there will be a Phase 2 and Phase 3?
Of course, having a Phase 1 deal is better than having nothing. I think that’s definitely true and encouraging. That being said, I think there’s still a lot of uncertainty regarding the enforcement and the implementation of the stage 1 deal. I guess we won’t see anything in the near future, probably not until the completion of the U.S. presidential election towards the later part of this year. But after that, I think two things are really worth watching out for.
One is what was the outcome of the presidential election and the U.S. side of the deal. The other is to what extent China would have been making progress towards those areas of reforms which will be meeting the expectations of the negotiation. So, I think it’s too early to tell whether we’re going to have a Phase 2 or Phase 3 deal but what’s more important is, I guess one China is on the right trajectory to implement further reforms.
Two, the rest of the world will be still welcoming China to continue its leadership in not just openings but also in its momentum to driving the global economy.
Six percent growth for 2019. There is now expectation that China will grow just about that. So, I was speaking with professor Fan earlier on. He said 6 percent is probably where we’ll be for the course of the decade. I spoke with Ken Rogoff of Harvard and he said in fact that he’s expecting an average 3 percent. How do you assess this GDP growth number and what the next few years might bring?
Longer-term prospect, I think there are two things which we have to be very careful about. One is, the uncertainties—geopolitical certainties and we’re having a close to pandemics going on in the one area. We are going to have some sustainable issues with the growth numbers.
But I think, I will be somewhere in between Professor Fan Gang and Professor Rogoff. I think 3 percent is probably a little bit too pessimistic but then I do see China’s economy gradually taking the step-down and I don’t think if we’re going to continue the 6 percent growth in the next decade.
I think it’s a relatively easier to forecast this year’s GDP growth number in 2020. I think will be somewhere close to a 6 percent. More likely to be on the downward side which is just enough for us to complete the doubling GDP per capita within the past decade objectiveZhu Ning, Associate Dean, Tsinghua University, Beijing.
So, somewhere between 3 and 6 percent?
Yes, I think I mean more like 4-5 percent.
You did bring up the issue of the Coronavirus right now and I know that China is grappling to deal with it. You expect that this will hurt those numbers in some way?
I think based on what things are, I think it probably will. For two reasons—one is the Chinese New Year and it is supposed to be the most joyful and most spending time of the year but given the constraints on the traveling, I think we’re going to see a big dip in those numbers.
Two, is just pure sentiment. I think then it’s just the people. They are scare, they’re not going out as much as they have planned to and that’s going to hurt the economy at least in the short term.
Along with GDP growth, the question I wanted to ask you is about the rebalancing of the Chinese economy. This has been something we’ve discussed over the last several years now—the shift away from investment to consumption. Professor Fang was saying that there might be a resumption of investment next year onwards. I’m curious of how you assess this rebalancing of the economy and the one big issue that continues to weigh on this rebalancing, which is debt in China?
I think you’re right on the money. I think we are in the right direction; we’re going towards the direction of transforming the growth model and then trying to contain that debt which has been accumulated near the past decades. However, I think it’s much easier said than done.
I think we’re going towards the route of deleveraging in the past three years but then we have seen a significant slowdown in the economic growth and a big drop in the Asian market back in 2015 and 2018. So, I think it’s a very delicate balance that the policymaker would have to try to weigh and regarding that, I think we have to be looking out for two areas of important messages.
One is the overall level of debt for China. I mean even after the past three years of deleveraging, the national level of that was actually higher now than it was three years ago. The other is, I think more importantly, where do we invest if we were to raise the funding. I think part of the reason why we’re having escalating debt is the investment projects. Mostly infrastructure, investments and housing related projects are not generally as healthy cash flows as people have been hoping for and how do we juggle that with the slowdown of the economy. I think that’s the bigger challenge.
Regarding Belt-Road, I think we’re still working patiently along that direction. I think this is a national strategy, this is a longer-term project. Why we’re probably witnessing a little bit of slowdown in the Belt-Road is the following two-fold reasons. One is, there’s still some confusion regarding what China is going to do with the Belt-Road and hence, there are some concerns and reservations with the project.
More on the economic side, I think the slowdown of international relations and the increasing of the national level of debt is sort of constraining Chinese hands in making bigger investments along in the country. So, I think that’s a combination of two which will take some time to resolve over the next few years and maybe over the next decades.
What number should we be working with? Because it’s really difficult to tell apart private debt in China from or state-owned enterprise debt. Can you put it in context for us as to why you are so concerned about both the absolute amount of debt and the trajectory?
That’s a very good question and I think it’s very important that we keep that in our mind when we talk about the Chinese economy. After all, I think a big part of China’s growth came from investment-related projects and many of the investments were actually made with the borrowing of debt. So, I think that the overall level of debt is high, but it’s not drastic.
We’re probably looking at the national level of debt to GDP ratio of 270 percent to China which is high relative to most emerging economies but it’s not high compared to Japan which is like a 100 percentage points higher. We’re somewhere around where the U.S. was right before the global financial crisis. So, I think that’s to put things into perspective.
What’s making China’s debt problem unique or more concerning is the following three areas. One is, I mean we still don’t have a very comprehensive or clear idea about how accurate the national level debt is. I mean this is the data were compiled based on approach and of course the local government have every incentive to understating their level of debt. So, this is one thing that I’ve been concerned with.
The second is, in China, a lot of the debt are what we call a contingency base of debt. It was not popping up unless the economy were to slow down, unless some extreme events were to happen, and we’re not fully prepared for that incident.
Another issue is, people try to make a big distinction between corporate debt and government debt in China but we have to be understanding that a big part of the corporations’ debt in China is actually corporate debt coming from the SOEs, which are closely linked to or backed by local and the central governments. So, in that regard, if we group all those SOE debt as the government debt, I think that’s depicting a very different picture than just saying the corporate debt is the major issue. It is not just that, I think the government debt is somewhat relative to that.
So, if you were to keep in mind the debt issues and the resolution of that and how challenging is going to be—the fact that GDP growth will slow to somewhere between 4 and 5 percent through the course of this decade. Do you believe that there is scope for China to continue to invest in a big way in the domestic economy?
Personally, I’m not too optimistic about another big way of investment in the coming out of China. I think we have to be mindful that the China has done a lion’s share of its work to stabilise the global economy after the global financial crisis. Partly, as a result of that, I think China has been a accumulating that as a result of the not-so-efficient or not-so-profitable investments it has made over the course of the past decade.
As a result of that, one is that, there’s not that much room for a further monetary easing, not just for China but this is pretty much true for many major economies in the world. Also, with the debt accumulating- the fiscal stimulus is also seeing a much smaller room for ways to maneuver. So, in that regard, we just don’t have as much space to move around with investment as we did a decade ago. Personally, I don’t think we should have go down that route because after all, that is a major reason why we’re seeing debt increasing so much in China.
The absolute level of debt, if that’s not surprising, the speed by which that has been accumulating over the past decade is very concerning.
How would you see — China’s economic leadership in the context of slowing GDP growth, in the context of internal debt issues, in the context of a trade. Do you think this decade will be as China prominent as the last decade?
Well, I think it will still be very China prominent. I mean yes, we’re probably going to grow at a slow pace, but the size of the economy is more than twice as big as it was. Also, I think China is trying to push very hard in sustainable growth, in green growth, in high-quality growth and also we’re trying very hard with the R&D, intellectual property rights protection. I think China is having more of its own research, its own brand and its own distribution centres. The vast majority of the middle-income class I think the consumption power that’s coming out of that, is good enough to propel China’s economy to go on for the next decade. Maybe not as fast as before, but still I think the resilience and the sustainability is what I look at.
On top of that, I think there are two things I want to just mention briefly. One is, China’s regional influence. I think it’s not just about China by itself, China and the countries around are working more closely now than before in many areas not just confined to economy. Two is, China is not just an economy but China is a symbol for the emerging economies. Whether that is sustainable for five decades? We can ask that question but at least for the starters, we have a lot of hope and the potential.
There are many emerging economies which are trying to take the China path and trying to grow their own economies. In that regard, it’s not just one country but it’s more of a growth model.Zhu Ning, Associate Dean, Tsinghua University, Beijing.
In spite of what’s going on in Hong Kong?
In spite of what’s going on in Hong Kong...